Put Your Business on Solid Financial Footing before Hitting ‘Unpause’

Due to the COVID-19 pandemic and resulting economic shutdown, we have counseled our clients about how they can protect their rights as creditors once the economy begins to ramp up again. We have also advised them on how to make sure that they do not end up in their own perilous financial situation.

Indeed, you may find yourself with one or more customers whose businesses fail. Those customers could become subject to out-of-court workouts and wind-downs in the months to come, or, because the CARES Act expanded small businesses’ ability to file bankruptcy cases under the Small Business Reorganization Act, you could find yourself a creditor in a customer’s bankruptcy case. Businesses will face their most significant challenges after non-essential businesses are reopened and operations are restarted in earnest. All business owners should heed the following advice as they prepare to reopen.

• Many government programs, grants and loans are available, as you have no doubt heard. You should absolutely try to avail yourself of government programs to help cover expenses and keep people on the payroll. You should not rely on them exclusively, however. The funds may be exhausted before you receive your loan commitment, you may not qualify or you may be required to repay more of the loans than you realize.
• If you are fortunate enough to obtain funds from a government program, make sure you follow the guidelines carefully. The government will be vigilant in making sure that recipients of government funds have not misrepresented themselves in obtaining and using such funds. Moreover, the lenders will enforce their remedies to the fullest extent of the law.
• If you are closed, start to formulate a strategy to reopen. Come up with a business plan now that is realistic. What will it cost to continue?  How much money will you have to invest? When will you be able to earn money from the business? If you decide to proceed, is there enough money to pay your salary? How long can you wait?  At what point will you run out money? How will you pay creditors if you and/or the business are not getting paid?
• Think twice about putting personal savings into the business if it is not likely to survive. You need to be honest with yourself to determine if the business will make it. Unfortunately, many business owners are afflicted with “rose-colored glasses-itis” and you may need an objective third party advisor (accountant, attorney, consultant) to help you make that determination. You must consider what will happen if you put your personal savings into the business, mortgage your house, or use retirement money and the business fails.
• Along these lines, if you have made a loan to the business and repaid any portion of it and the business subsequently files for bankruptcy, there is a high likelihood that a trustee will seek to recover any loan repayments paid by the business to you.
• A realistic budget is critical. It may be necessary to cut wages in exchange for employees keeping their jobs. Consider creative options like allowing employees to work from home and staggering their work hours. To say nothing of ensuring you are following safety standards to protect your workforce, like social distancing, masks, gloves, etc., you may find out that you can even reduce some of your overhead, like rent.
• Communicate with your employees. They are all concerned about keeping their jobs. Let them know about your plans to reopen the business and maintain a safe work environment to keep everyone healthy.
• Consult with your attorneys, accountants, bank and other advisors to determine how to protect yourself from your customers’ financial problems and what you need to do to strengthen your own business. It is important to utilize all resources available to you to put yourself in the best position to succeed.
• Keep in contact with your customers and vendors. Let them know the status of your business and your intentions, and make a reasonable assessment of theirs. It is critical to maintain relationships during these challenging times.
• Even longstanding customers with a good track record may not be able to pay timely. Scrutinize all new customers: Run credit reports, do judgment/lien/litigation searches and require a financial statement. Also, periodically request updated statements. You should be aware of potential problem customers before they become your problem. If necessary, you can also request collateral, a personal guaranty or other security in order to minimize your risk.
• Preserve cash for essential operating expenses like rent, payroll, mortgage and key supplies necessary to stay in business. As is often the case, cash-on-hand is king.
• Be proactive with your lenders, landlords and key suppliers. Transparency is paramount. If you cannot pay on time, let them know as soon as possible. It is better to be forthright and honest. Your credibility is at stake and you may not get another chance to rebuild it.
• Do not lay out expenses without assurances that you will get paid. You do not want to become the bank and have to wait to get paid after laying out limited cash resources. Think twice about creating a liability if there is any risk of not getting paid.
• Before you take on new business, make sure you have the raw materials to make the product or the ability to perform the service.
• To the extent possible, try to get paid in advance or by C.O.D. If that is unrealistic, credit cards and wire instructions allow for immediate payment so you do not have to wait for the check to come in the mail (it may never come). Another idea is to maintain your customer’s credit card on file with a pre-authorization to charge it if you are not paid timely. Alternatively, get a letter of credit. It can provide better protections if your customer files for bankruptcy.
• Businesses are responsible to pay employees even if they have not been paid. Remember that in New York business owners who do not pay their employees can be personally liable.
• Continue to pay all taxes, including payroll, withholding, sales tax and other trust fund obligations. They are sacrosanct. That money does not belong to the business; it is held by you in trust. You are a fiduciary and you may not take it as a loan under any circumstances. If you “borrow” the trust funds and the business does not survive it will not get paid back and you will face personal, and potentially criminal, liability.
• Monitor and collect accounts receivable, since the older they are, the less likely you are to ever collect them. Make deals to collect what is owed. If necessary, work out payment plans with vendors and customers to maximize cash flow.
• Purchasing credit insurance and/or business interruption insurance may provide additional protections, but it is critical that you understand precisely what coverage you have so you do not rely on coverage that may not, in fact, be available.
• Make sure your sales and collections departments communicate about outstanding receivables so that problem customers do not run up greater balances.

The coming months will test the viability of most businesses, but with proper planning and foresight, you can set yourself up to have the best chance to succeed. Rivkin Radler’s attorneys are available to help you navigate through these uncertain times.