Small businesses continue to suffer from a pandemic. Is Bankruptcy the Answer? – Councilor Forbes
The coronavirus pandemic has been brutal for small businesses. Nearly 79% of small businesses felt a moderate to significant negative effect from the pandemic, according to an August 2020 US Census Bureau Small Business Pulse survey.
“I never would have imagined myself in this position,” says Nicole Rosen, founder of Mizfit Inc., a company that offers after-school and summer dance classes to schools in South Florida. Rosen’s company successfully applied for a Paycheque Protection Program (PPP) Loan to help keep payroll and operations going, but without the same level of demand or the ability to run in-person classes, she still had to let multiple employees tap into their savings to stay open.
“I pivot and do whatever I can to survive,” Rosen says.
Although the PPP was touted by US Treasury Secretary Steven Mnuchin as a huge success, government data indicating that the forgivable loan program has supported more than 51 million jobs, the sustained economic downturn and its effects on small businesses have far exceeded anyone’s expectations, leaving many businesses wondering what else they can do to survive.
While Republicans have touted reopening the economy as a way to save small businesses, it may not be the panacea business owners are hoping for.
In New York, for example, restaurants will be able to accommodate indoor dining at 25% of capacity starting September 30. But many restaurateurs fear that the income generated by this reduced capacity will not be enough to save their businesses, nor to rehire. all their employees.
In one interview with the New York Times, Eric Ripert, chef at Le Bernardin, said: “I know I can make it run at 50%, but the setup and running expense vs. revenue, my gut tells me it won’t run at 25%. %.
Some business owners have placed their hopes of survival on another P3 cycle. But the The Senate did not pass its latest stimulus bill, and with lawmakers stuck in a multi-month stalemate, there may not be any relief until the end of 2020.
As funds from CARES Act programs like PPP and the Small Business Association (SBA) Economic disaster loan (EIDL) Advance grants have run out, small business owners wonder if they can survive until, or even if, additional government assistance arrives.
“The [CARES Act] sort of cushioned the immediate impact but didn’t solve anything in the long run. says Ike Shulman, co-founder of the National Association of Consumer Bankruptcy Attorneys (NACBA). “There will be people who file for bankruptcy who never had a clue that they would need a bankrupt lawyer.”
When a company has already exhausted its PPP loan but sales haven’t rebounded, what’s next?
Stuck in limbo as lawmakers drop out
Small business owners awaiting negotiations over future help may consider looking to other avenues, although each presents its own potential pitfalls.
The “Fast cash” options, which are Credit lines issued to a small business and often backed by a personal guarantee, have multiplied in recent months. And while it might seem appealing to get some quick cash to help you out, these types of loans often come with very high interest rates, says Leslie Tanye, lawyer and founder of the debt solutions law firm Tayne. Law Group, PC in Melville, New York.
“In the current environment, alternative financing is limited, loans are more constrained,” says Tayne. “It becomes a trap for a business owner: what do you do to make money and how do you keep your business in place? “
Though there is low cost small business loan programs available, including SBAs EIDL program, the Federal Reserve’s Main Street Lending Program (MSLP), and community development financial institutions (CDFI loans), the idea of owing money can be unappealing without a clear path of how to repay it.
“I don’t owe anyone money, I don’t want to owe anyone,” says Joey Ball, who owns several franchises in the greater Los Angeles area. “It will be a difficult decision to think that you are going to have to borrow money to stay afloat or just file for bankruptcy and wait for it to end and start again.”
Ball says he received PPP funding, but the money he received for his seven businesses, including five massage and skin care salons, a waxing salon, and a tanning salon. , has now been spent. His businesses are closed and he predicts that at least two of them will never reopen.
Ball also says many of his employees have moved on to other jobs now besides the federal government. Unemployment benefit of $ 600 has ended, making it almost impossible to reopen even if he could.
“The only thing at this point that’s going to save me is a second round of PPP,” Ball said. “Basically the government controls my destiny. “
What to do when you don’t want to quit
Permanently closing your doors may not be your only option.
“The natural inclination is that people don’t want to drop [for bankruptcy], they will do their utmost to stay afloat; but if the mountain of debt they are facing is so large that they know it is a real possibility, then the sooner they organize themselves the better, ”says Shulman.
Another option can be debt negotiation.
“Renegotiating your debts with an experienced financial lawyer, especially if you have assets, allows more flexibility than in bankruptcy,” says Tayne. “Obviously, bankruptcy is an option, but it’s complicated and expensive. Often times, small business owners have mixed personal funds with business funds. And, when a person’s personal money is entangled in their business funds, it can be extremely difficult to tell which is what a requirement for bankruptcy proceedings.
Tayne recommends taking stock of any business assets that you can potentially sell or use as bargaining chips with creditors, as well as carefully reviewing your cash flow to see if your business is viable in the current economic environment. .
Debt renegotiation can also have a lesser impact on your business and personal credit. It depends on the type of business you have, but a business bankruptcy can sit on your personal credit report for seven to 10 years, and on your business credit reports for up to 25 years.
If all signs point to bankruptcy, choose the right type
There are generally two types of business bankruptcy options:
- Chapter 7. This completely liquidates a business and all proceeds are used to pay off unpaid debts. Your business can no longer function, but you will no longer have debts.
- Chapter 11. It is a reorganization of a company’s debts that allows creditors to work out a payment plan, sometimes at a reduced amount while continuing to operate the business. This requires a debtor to complete credit counseling first and can be an expensive proposition with filing fees alone of up to thousands of dollars. But if you think there is a chance that your business could eventually return to profitability, Chapter 11 may be the right choice.
There is a provision in Chapter 11 that may make it more palatable to small business owners who are trying to buy time until the economy rebounds. Within the Small Business Reorganization Act, 2019 (SBRA), there is an option that allows companies to spread administrative costs over three to five years compared to the traditional upfront payment of administrative costs.
Before taking any action, consult a lawyer to help you determine your next steps. Many bankruptcy or finance lawyers offer free consultations before you need to commit to working with them or taking legal action. Most states have legal aid societies or lawyers who will take cases pro bono or at significantly reduced cost for those who qualify financially.