Examining the Solvency of Vendors, Customers, and Your Business During and After the COVID-19 Crisis

Socially and economically, we are living in truly unprecedented times, especially in the downstate New York and broader Tri-State area where we have been hit exceptionally hard by the COVID-19 pandemic.  Many businesses which closed during the pandemic will never reopen, and many more will struggle to get back on their proverbial feet after weathering the worst of this storm.  The PPP loans offered by the SBA have allowed many small businesses to continue to meet obligations for a few months during their shut down, but that money is about to run out and many businesses do not know where to turn next.  The silver lining here is that businesses have many options for restructuring their relationships with vendors, customers, landlords, and even their lenders.

Although it may seem obvious, in these troubled times the vendors that traditionally had trouble filling orders and the customers who always paid late will likely be the first to go out of business.  With respect to those vendors and customers, businesses may consider cutting ties before they run up too high of a debt, or negotiating adjusted terms which are more beneficial to the company such as getting large deposits from customers or paying vendors less if they deliver late.  Setting up backup vendors before the current vendor fails is also a good idea so that your business is not scrambling if an important vendor runs into financial issues and can’t deliver.

Troubled times also make it especially important to plan ahead and businesses should make sure to budget out for at least 6 months.   Most companies need to be realistic about what the business world will look like in the coming weeks, months, and years, and in most industries it is important to be very conservative when projecting growth.  It is also important to understand that some businesses which implemented cost-cutting measures during the pandemic are going to realize that those measures worked and that they don’t need those discretionary products or services going forward.  If you’re in the business of selling discretionary products or services, you need to be concerned about that possibility and project accordingly.

Even for the most struggling business, a chapter 11 bankruptcy filing has typically been a last resort and that will likely continue.  However, coincidentally last year Congress passed the Small Business Restructuring Act, or SBRA, which went into effect in February. The SBRA has made the chapter 11 process much more affordable for small businesses and allows small business owners to reorganize their companies, shed bad debt, and keep their equity when they would not have been able to do that previously. And as part of the CARES Act, Congress also raised (for one year only) the amount of non-insider debt a company can have to qualify to $7.5 million.  This means many companies which otherwise would never have been able to afford to successfully reorganize through a bankruptcy now can.

Although bankruptcy is usually a last resort, the new SBRA actually allows small businesses to move quickly through a bankruptcy process and force terms upon their creditors instead of the other way around.  It’s a great tool for what we like to call “right sizing” (not downsizing) a business and can help get struggling businesses through these tough times.

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