Proactive Financial Strategies for Small Businesses During COVID-19
March 24, 2020
By: Elizabeth Amandus Baker, Wendy G. Adkins, and Jason L. Ott
COVID-19 has shut down or significantly curtailed operations of many businesses across the country for the foreseeable future. Going weeks or more with little or no revenue is a serious hardship for any business. In these uncertain times, there are things that businesses can do.
What can you be doing in a time of financial stress like this to prepare for the days to come?
First, refresh yourself on the terms of your agreements with banks, lending institutions, vendors, landlords, and others. Outline your company’s obligations and covenants for each contract. Likewise, identify what rights you may have with respect to upcoming payments you must make and any relief you may be afforded in making such payments.1 Taking inventory of these competing obligations will help you determine the best avenues to avoid defaults, even if you are not able to make all of the payments that your company routinely would make. Additionally, review and inventory the rights and obligations of parties obligated to pay and/or supply products or services to you.
Second, reach out to counterparties sooner rather than later to discuss and possibly renegotiate any troubling contractual requirements. Communication is the key to maintaining healthy contractual relationships, and parties can often work through anticipated problems more smoothly when addressed in advance. Vendors and customers, many of whom you might consider to be business partners in a sense, will likely understand and share your frustration with the difficult situations we are collectively experiencing in this Pandemic.By keeping the lines of communication open, you may achieve short term flexibility and even strengthen your overall business relationship in the long term. Keep written records of these conversations and document any modifications or extensions negotiated.
Third, investigate what other forms of relief might be available. In some instances, insurance products provide coverage for business interruption. Government agencies may also provide relief to businesses ordered to closed or enact protective measures against creditors seeking to commence foreclosure. The U.S. Small Business Administration is offering low-interest Economic Injury Disaster Loan assistance to small businesses and private, non-profit organizations in designated areas of a state or territory to help alleviate economic injury caused by COVID-19.2 A number of counties have already been designated to receive this relief, including in the states of Indiana, Kentucky, Ohio, Virginia, and Pennsylvania.3
Additionally, eviction and foreclosure moratoriums are quickly spreading at the state and national level. On Wednesday March, 18, 2020, President Trump announced a moratorium on foreclosures for loans backed by Fannie Mae or Freddie Mac for at least sixty days.4 The Department of Housing and Urban Development also has suspended evictions and foreclosures through April.5 Similar moratoriums on eviction are being adopted at the city level, including in San Francisco, California; Los Angeles, California; Austin, Texas; Boston, Massachusetts; Miami-Dade County, Florida; Montgomery County, Virginia; and Travis County, Texas.6 In Denver, authorities announced that deputies would be redeployed from evictions to other tasks. Other jurisdictions will likely adopt similar measures in the coming days and weeks.
Fourth, begin thinking about a long-term strategy to address any significant issues that cannot be renegotiated. Reach out to trusted financial advisors and attorneys to help evaluate long term options. Communication with counterparties, including lenders, is an essential step in this process because they may have ideas to help you weather this storm. By being proactive and reaching out to lenders especially, you may be able to negotiate favorable forbearance or related terms that just might be the key to your business surviving this difficult time.
If a long-term solution cannot be achieved by modifying, renegotiating, or terminating burdensome contracts consensually, a bankruptcy reorganization might be the appropriate option. Bankruptcy reorganization allows you to maintain control of your business, continue operating in the ordinary course, restructure burdensome debt, and generally renegotiate and/or terminate contracts that are burdensome, including leases for store locations that may no longer be financially viable for your company. Bankruptcy also automatically stops most efforts by creditors to collect debts from your company in order to give you the “breathing room” to achieve a fresh start through a viable reorganization. While the bankruptcy process has historically been a very expensive process, Congress has recently enacted a new subchapter of the Bankruptcy Code for small businesses designed to achieve reorganization more affordably. This Small Business Restructuring Act may provide the right vehicle for many small businesses to come back from the economic crisis caused by the COVID-19 Pandemic.
By taking these steps, your company will be positioned to address economic challenges proactively, rather than merely reacting to problems after-the-fact when fewer options are available
We will continue to update this blog with information as it develops.
1 For more information on the potential effect of force majeure clauses, click here and here.
2 See https://www.govloans.gov/loans/loan-details/1504; https://disasterloan.sba.gov/ela/Information/EIDLLoans.
3 See https://disasterloan.sba.gov/ela/Declarations/Index.
4 See https://thehill.com/homenews/administration/488227-trump-orders-hud-to-suspend-evictions-and-foreclosures.
5 See id.
6 See https://www.forbes.com/sites/dimawilliams/2020/03/14/cities-and-counties-halt-evictions-to-fight-the-coronavirus/#481a72d714b8; https://www.latimes.com/homeless-housing/story/2020-03-17/coronavirus-eviction-moratorium-los-angeles-city-council-foreclosure-relief