Mitigating Business Bankruptcy Risk Amid the COVID-19 Pandemic

The COVID-19 pandemic continues to create uncertainty for businesses. Industries currently most impacted by the coronavirus include restaurants, entertainment venues, hospitality and airlines. Many companies’ goal at this point is simply to stay in business over the long term. 

Today, many financially troubled companies are exploring different options and alternatives to weather the storm. For some, if they cannot pull through this crisis, the only option may be to get a fresh start by obtaining protection from creditors during a period of reorganization under chapter 11 of the U.S. Bankruptcy Code or liquidation under chapter 7. Business bankruptcy law is an organized process to deal with a troubled company. 

For some, a bankruptcy filing is akin to a funeral and the bankruptcy judge will preside over the demise of the business and distribution of property. For others, the failing business is in the emergency room hoping to survive, but is facing the possibility of immediate death. Here are three tips businesses can implement to mitigate bankruptcy risks.

1. Conserve Cash

Cash is king and the blood flow within an organization. Many companies become insolvent because they are bad businesses. Some great companies become insolvent because they run out of cash. Without cash, even a great organization can be in danger of insolvency. Conserving cash varies for every organization, but the aim is to remain stable and sustain good cash flow.

One example to prevent the danger of insolvency is to provide your vendors discounts for prompt payments. This is a win-win situation because customers want to save money and prompt payments increases a company’s cash flow and avoids debt servicing issues.  

2. Communicate with Your Lenders

Be proactive and reach out to your lenders to determine what help is available. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, and provides relief to eligible small businesses. The CARES Act includes the Paycheck Protection Program (PPP), which helps businesses maintain their workforce during the COVID-19 crisis. PPP allows small businesses to keep workers on payroll for eight weeks and the loan proceeds can be used for payroll, rent, mortgage, interest or utilities.

Additionally, the CARES Act affords eligible small businesses an Economic Injury Disaster Loan (EIDL), which applies for the loss of revenue as a result of the COVID-19 outbreak. Under EIDL, small businesses could still receive a $10,000 grant if denied the loan. Both EIDL and PPP have forgiveness provisions, which may allow a business not to repay the loan. You should consult with your lender as to whether it is worth participating in this program. 

3. Cut Costs

It is time to trim the fat by cutting non-essential expenses to remain solvent. Although situational, for some cutting non-essential expenses may mean reducing sales and marketing costs, travel expenses, entertainment, salary and wage expenses, and office supply costs. One way to determine whether the operating cost should be cut is to ask whether it is generating revenue. It is crucial for businesses to keep track of operating costs and determine if the company can be run more efficiently. 

Businesses must have the ability to pay ongoing obligations and service debt obligations. Employees, suppliers and trade creditors must be paid on a regular, short-term basis. Capital creditors must be paid, otherwise they can throw a business into bankruptcy. 

While filing a bankruptcy case is not the end of the world for many businesses, many wish to avoid such a filing. The tips above certainly are not an exhaustive list, but are practical in supporting sustainability for the uncertain times ahead of us.

This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

Barnes & Thornburg LLP is a large, full-service law firm that seeks to take a more entrepreneurial and cost-effective approach both to client service and its own business.