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March 25, 2020 Article

Not Business as Usual: COVID-19, Small Businesses, and Bankruptcy

Five tips for small business owners weathering the financial effects of the pandemic.

By Andrew E. Arthur

We are monitoring the coronavirus (COVID-19) situation as it relates to law and litigation. Find more resources and articles on our COVID-19 portal. For the duration of the crisis, all coronavirus-related articles are outside the Section of Litigation paywall and available to all readers.

As states across the country are requiring non-essential businesses to close their doors to combat the spread of COVID-19, it is not business as usual for the majority of business owners. Small businesses are concerned about the piling up of rent, utilities, and payroll and whether their limited cash flow could allow them to keep operating once the virus is contained and businesses across the United States are allowed to reopen. While it is easier said than done, small business owners need to keep calm, remain positive, and keep in mind that there is light at the end of the proverbial tunnel. For the time being, small business owners can heed to the following five principles during this time.

There is no playbook or manual that anyone can point to in order to navigate or mitigate the effects of the COVID-19 national pandemic on businesses.

There is no playbook or manual that anyone can point to in order to navigate or mitigate the effects of the COVID-19 national pandemic on businesses.

Maskot/Maskot via Getty Images

1. Stay Abreast of Current Legislation

There is no playbook or manual that anyone can point to in order to navigate or mitigate the effects of the COVID-19 national pandemic on businesses. The news is fluid and changing by the hour, and therefore it is important to continue to remain informed on new state and federal legislation that could impact your business. To remain up to date, small business owners can refer to the Small Business Administration (SBA) website and law firm websites, where many firms have created COVID-19 resource webpages that summarize relevant legislation and provide up to the minute updates on information that can help your business.  

2. Take Government Offered Grants or Small Business Loans

Prior to the mass shutdowns, a small businesses owner confided in me and questioned whether he should take out a loan to cover his expenses as result of his declining clientele. His reason for questioning was because doing so would be adding to his debt.  However, one must consider the ramifications if the government funds are not taken. The government has and will be continuing to help small businesses with grants and loans with little to no interest.  

As of the writing of this article, the SBA announced it is offering up to $2 million to each small business impacted by COVID-19 as part of the Coronavirus Preparedness and Response Supplemental Appropriations Act, signed by President Donald Trump. According to the SBA, the loan is designed to cover “fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.”

Moreover, some states and localities are providing financial relief to small businesses that have lost revenue because of COVID-19. For instance, on March 8, 2020, New York City Mayor Bill de Blasio announced that New York City businesses with less than 100 employees and at least a 25 percent drop in sales caused by COVID-19 will qualify for loans of up to $75,000, with no interest. Further, small businesses with fewer than 5 employees can apply for a grant to cover 40 percent of their payroll expenses for 2 months.

If the state or federal government is offering funds to keep businesses afloat, this is no time to be hesitant. A business should take full advantage. However, try to avoid high interest loans or credit cards, as this can exacerbate problems down the line.

3. Consult a Reputable Bankruptcy Attorney or Law Firm

Several law firms offer free consultations and can help you navigate through several bankruptcy options, such as Chapter 11 bankruptcy. While bankruptcy usually comes with negative connotations, it is not only a way to give your business a fresh start but also keep your business operating. A Chapter 11 can help a debtor balance its income and expenses and regain profitability while also formulating a plan to pay down the debt that the business owes.

In fact, as of February 2020, Chapter 11 bankruptcy has become easier for small businesses because of the Small Business Reorganization Act of 2019 (SBRA) passed by Congress and signed by President Trump on August 23, 2019. The SBRA was created and implemented “to expedite and reduce the cost of bankruptcy for small business debtors to reorganize their debts and save their businesses[.]”

Another option is filing a Chapter 13, which can be a restructuring option for small businesses owned and operated by individuals (a sole proprietorship). Only individuals may file Chapter 13, so it is not an option for businesses operated through partnerships, limited liability companies, or corporations. Chapter 13 eligibility is also subject to debt limits. As of April 2019, an individual owing more than $419,275 for unsecured debt and $1,257,850 for secured debt can't file Chapter 13 (debt limits for 2020 have not been released at the time of this article). 

4. Remember Your Business’ Debts Are Not Necessarily Your Debts

If your business is unable to continue operations, it is likely because your business cannot pay overhead costs, employees, and/or inventory. While this is understandably stressful, it is important to remember that your business’s debt is not necessarily the business owner’s debt. Your business is a separate legal entity and therefore, a creditor cannot go after your house, car, or other personal valuables unless you signed a personal guarantee or have a business formed as a general partnership or sole proprietorship. In a Chapter 7, a trustee is appointed to administer a debtor’s bankruptcy estate which includes all of the business’s assets that will be liquidated to pay creditors. Consult a bankruptcy attorney to help guide you through this process.

5. Be Proactive in Thinking about Next Steps for Your Business

Your own health and the health of the people around you should always be your first concern. But while you continue to self-isolate, also continue think about the health of your business. Be proactive by looking for the financial opportunities that are being offered and will be offered to small businesses in the days to come. Consult with a financial advisor in order to weigh these financial options and/or a bankruptcy attorney if you believe bankruptcy may be an option for your business.

Since this article was published, Congress passed The Coronavirus Aid, Relief, and Economic Security (CARES) Act and with it the Paycheck Protection Program (PPP) as a way to help qualifying small businesses with the resources they need to maintain their payroll, hire back employees who may have been laid off, and cover applicable overhead.

Andrew E. Arthur is an associate at McManimon, Scotland & Baumann, LLC, in Roseland, New Jersey.

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