March 18, 2020
By: Neil J. Smith
So you’ve followed all the CDC guidelines, obeyed the orders issued by Governor Cuomo, and heeded the advice of my colleague Chris Jones with the same fanatical devotion as a samurai obeying his master. (https://mackenziehughe.wpengine.com/blog/new-york-provides-for-additional-paid-sick-leave-and-other-benefits-for-employees-under-covid-19-quarantine-order/). But most companies in the US are heavily indebted, and almost all companies’ cash flow will be reduced to a trickle if they have not been shut down already. Here are some tips from a bankruptcy attorney on steps you can take now to avoid bankruptcy in the upcoming two or three months.
Of course, at first glance this appears to be counterintuitive. And it is usually true that the last thing a heavily indebted firm should do is take on more debt. But these are not normal times. And if additional debt is the only source for additional cash, then that is the resource that firms must tap into.
Moreover, I have found that the success or failure of a business in the Chapter 11 bankruptcy context is most strongly correlated with the amount of a company’s assets and cash, and not its absolute debt load. For example, it is infinitely easier in bankruptcy court to save Company A that has $1 million in cash, $5 million in long term assets, and $10 million in debt, than Company B that has $10,000.00 in cash, $2 million in long term assets, and $1.5 million in debt. Absent substantial income, Company B would burn through its cash inside of a month in Chapter 11, and then would be forced to liquidate, despite the fact on balance sheet terms it is in a stronger position than Company A.
2. Offers you shouldn’t refuse. Once options of critical financial relief for consumers and businesses are available, don’t hesitate to avail yourself of them. In addition, various localities (such as the City of Syracuse) are making loans available to small businesses in distress. Finally, the SBA has made additional loans available to small businesses in affected areas, including New York. https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources Don’t wait to apply. Get the cash before you need it, not after.
3. Who you gonna call? Your loan officer, obviously. Then call your landlord, if you have one. Then call your loan officer again. Then call your suppliers. Ask them for what programs or deferments they can offer to you. Your lenders and landlords want your company to survive as much as you do – landlords don’t make money from empty buildings, and banks don’t make money off defaulted loans. So give your lender a call right away– they are ready to believe you. Despite the temptation, don’t wait until you start missing payments.
4. Don’t panic. A British author once commented that “don’t panic” was perhaps the best advice that could be given to humanity. Given that this blog exists, I don’t think it’s “the” best – but it’s still very, very good advice. Don’t do anything rashly, and before you undertake action that you are unsure about, be sure to contact your legal and accounting professionals for their advice.