This corona period has taught us lots of things from social, spiritual, and political consequences. But one area that every business is grappling with is how to economically shrug off the repercussions that this pandemic has caused since the mitigation measures put by the MINISTRY OF HEALTH in trying to flatten the curve. A famous author and C.E.O namely Ann m Mulcahy put it that when she became CEO of Xerox 10 years ago, the company’s situation was dire. The debt was mounting, the stock sinking, and bankers were calling. People urged her to declare bankruptcy, but she felt personally responsible for tens of thousands of employees.
Proverbs 37; 21 states that ‘The wicked borrow and do not repay, but the righteous shows mercy and gives. As we rightly put it in Kenya ‘deni ni kulipa’. This is irrespective of the situation or circumstances at hand. During this Covid-19 period firms especially the property industries have been hit hardest, owing to the nature of work engaged. Most have closed, others have laid off staff and most have had employees on half if not delayed monthly remuneration. The situation becomes even direr if the company or its directors are servicing a mortgage or a credit facility which now stands in default owing to the effect of income in most companies.
The CENTRAL BANK issued guidelines on loan repayments during this pandemic period main being a MORATORIUM PERIOD of six months to borrowers not to be listed at CRB if your loan is in arrears, underpaid, or defaulted altogether. However, the circular was silent on loan restructure and accrual of interest if indeed the facility was defaulted leaving borrowers at the mercy of the parent lender.
Case example- A local estate agency and valuation firm have two credit facilities in a Bank, with a total running balance of eight million whose monthly installment is 304,200KSH inclusive of interest and a remaining payback period of four and a half years. The company has a monthly recurrent expense of 1.85 million per month in salaries, office space (rent), stationery and operational costs. The firm therefore requires making at least 2,154,200KSH to meet its monthly statutory obligation. Owing to the halt of movement (curfew), loss of income, and closure of third-party agencies that enable proper facilitation of reports and authority the firm can only manage to pay for its office space. The directors have had to chip in from personal resources to keep some OPERATIONAL COSTS AFLOAT giving preference to office rent alone. The biggest casualty remains to be the BANKS CREDIT FACILITY. A meeting was therefore called amongst the shareholders after five months since March and the elephant in the room was WHAT TO DO WITH THE LOAN ARREARS AND AN ACCRUING INTEREST which was no longer tenable.
During the earlier days of Covid, the president’s speech was very elaborate on firms approach in mitigating this pandemic financially, that the major casualty should not necessarily be the Human force. This was due to the general implication that this would have had in the country. The Directors therefore had made a resolve that UNLESS things were at their worst they would try as much as possible not to affect the employees’ pay. Having consulted widely on how to manage the ‘elephant in the room’, they came up with a four area action plan
Ø Approach the bank for a loan reschedule and channel all disposable funds towards the loan repayment. This enabled them to reduce the amount required in monthly installments by increasing their repayment period.
Ø Reviewing the yearly budget whereby all expenses were reviewed and preference is given to managing all related financial costs (loans, creditors and unpaid suppliers)
Ø Consolidate the two loans- Merging the two loans became easier to renegotiate the terms with the bank and all focus can be geared towards repayment. The key is to use the cash that has been freed up from lower payments to keep paying down the debt.
Ø Suspend any borrowing henceforth- As the saying goes ‘if you find yourself in a hole stop digging’.
Post this corona period truth be told there will be three scenarios, firms that will completely shut, firms that will take time to recover from the losses of 2020 and those that have placed themselves strategically to reap from the downfall of the latter. Companies therefore need to do a thorough analysis of where they are and what dynamics have changed and the repercussions of the same to their business.
Having talked to the MD the other day he told me business is looking up having signed contracts to manage a mall in one of our major towns and two commercial major buildings here in the city Centre. Through the steps taken in managing their debt they hopefully intend to clear their installment before the first quarter of 2021.
As a Director, you NEED to understand the concept of debt i.e. is it a good or bad debt, is the Debt Pitfalls being in too much debt making your debt-to-income ratio too high, and that can hurt your credit score. Both factors can cause you to be denied credit. Your debt-to-income ratio is the amount of debt you have compared to income. If your company debt is higher than 36 percent of your income, you will have a difficult time getting credit. If your debt is so overwhelming that you miss payments your credit score will go down, also preventing you from getting credit.
Roger Stone rightly put it ‘in business, if you don’t pay your debts you’re finished.
Article by Seth Njoroge Kamau
Sacco Administrator
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