In a recent CBS 60 Minute program interview, Federal Reserve Chairman Jerome Powell mentioned the possibility of a wave of avoidable COVID-19 related insolvencies amongst small and medium-sized businesses resulting not only in the loss of those businesses, but also in significant job losses. For those small and medium-sized businesses concerned about your future viability as a result of the pandemic, it’s time to have a discussion about how to make a potential insolvency avoidable. Now is not the time to stick your head in the sand. Now is time to get your financial house in order and engage with your creditors so that you can emerge from this pandemic with a platform for future success.
Attorney Frank Fitzgerald at his office.
Let’s start with the definition of insolvency, namely “the inability to pay one’s debts when due.” The key phrase here is “when due. " So, if the negative impact of the pandemic has stifled your cash flow to the point where you can’t pay your bills on time, then the solution is to “change the due date.” The economic uncertainty caused by the pandemic has created a situation where changing the due date has become a very pragmatic way of deferring catastrophic businesses loss due to insolvency. Business owners, landlords and governments are all finding it in their best-interest to be patient with their debtors. Therefore, the opportunity is there for your business to survive this pandemic by aggressively pursuing deferrals of the due dates of your obligations.
To do so, you will need to assess where you are with accurate financial information. Put together a basic balance sheet, showing what you own and what you owe, and more importantly when your debts are due and the likelihood you have liquidity to pay them. Pay particular attention to your payroll requirements. Meeting payroll is not something that can be deferred and not meeting payroll can have serious consequences for the business owner, including both civil and criminal liabilities.
Assuming your business is viable but meeting payroll is an issue, borrowing through programs such as the PPP/SBA Loan Program, Disaster Relief and Main Street Lending Program should be explored if you haven’t already. Beyond payroll, you should look to defer payments to your suppliers and others on a voluntary basis by demonstrating to them that you have a viable plan going forward and that you will survive the pandemic and ultimately remain as a customer.
If you are a tenant, you will find that many landlords understand these extraordinary circumstances and will be willing to accept a deferral of your rent for a time period in order to preserve you as a tenant. In fact, banks in general have shown a willingness to work with landlords and customers with deferrals of principal and interest. Bank regulators have supported these deferrals and are encouraging banks to do so.
As a last resort, if voluntary deferrals are not available or you are unable to change due dates, then you should explore available debtor remedies such as bankruptcy protection which will hold off non-cooperating creditors and give you an opportunity to reorganize. Recent changes to the law have made bankruptcy reorganization a more feasible option for many small businesses.
No matter which of these strategies you choose to pursue, the key is to remain proactive and develop an overall plan to deal with your unique set of challenges. This will help you avoid putting out individual creditor fires each day as they flare up. Instead, you will put yourself in the best position to preserve and protect your assets so that your company can survive and thrive long after this pandemic has passed.
(Attorney Frank Fitzgerald is principal owner of Fitzgerald Attorneys at Law, is chairman of the board for New Valley Bank and is a Trustee Emeritus of Western New England School of Law)