Liquidity in the Time of Crisis:

Business Strategies in the Midst of a Pandemic

 

By: Cassie Nielsen, an associate at Rubin & Levin

            The global COVID-19 pandemic is unprecedented from nearly every perspective.  Leaving little outside its wake, the pandemic forces businesses to confront their books, look closely at the red versus black, and consider various options for increased cash flow.  Now more than ever, proactive measures may determine survival.

 

A.     Collection of Outstanding Receivables

Before looking to external relief, businesses are wise to review their receivables and initiate collection of past due accounts.  Although there exists a moratorium on evictions and residential mortgage foreclosures under the Coronavirus Aid, Relief, and Economic Security Act[1] (the “CARES Act”) enacted March 27, 2020, there are currently no wholescale prohibitions on the collection of business-related debt[2].  Accounts receivable health translates into cash flow and liquidity.  Businesses should engage in a detailed review of outstanding accounts, initiate contact with indebted parties, and solicit all possible information concerning their customers’ current financial situation to determine the viability of their collections.  That analysis will assist creditors make decisions on informal resolutions, including whether to accept less than the full amount owed, or whether to escalate the account to formal collection activity.  Logistical hurdles from social distancing and prohibitions on public gatherings may be impediments to some collection actions or lawsuits moving quickly, which is all the more reason to assert your claims sooner than later.

 

B.     Short Term Loans

The United States Small Business Administration offers numerous short-term, low interest loans to keep businesses afloat during this difficult time:

 

• Disaster Loans: The SBA’s Economic Injury Disaster Loan program provides small businesses loans of up to $2 million. Under the CARES Act, eligibility has been expanded to include most businesses with less than 500 employees.  The CARES Act also provides for an emergency grant advance of $10,000.00 to an eligible entity who has applied for a Disaster Loan; the advance is to be distributed within three days of application and is designed to be used for providing paid sick leave, making payroll, paying overhead costs, and payment of business obligations which cannot be paid due to loss of revenue.  Even if the ultimate disaster loan is denied, the advance need not be repaid.

 

• Express Bridge Loans: Express Bridge Loans allow business to receive up to $25,000 through a simplified underwriting process. Express Bridge Loans may only be issued to eligible small businesses which have a pre-existing SBA lender relationship at the time of a disaster declaration and is designed to be short-term while businesses await/apply for longer-term financing.

 

• 7a, 504, and Microloans: The 7(a), 504, and Microloan programs provide further avenues for expedited financing.  504 Loans are designed for economic development, real estate, and modernization and provide businesses with up to $5.5 million to acquire fixed assets for expansion or modernization. Applications must be made through a Certified Development Company.  Microloans provide up to $50,000.00 for start-up companies.

 

The CARES Act “Paycheck Protection Program” expands the SBA’s existing 7(a) Loan program to provide up to $10 million to a qualified business (generally, 500 employees or less) during the specified timeframe of February 15, 2020, through June 30, 2020 with a maximum interest rate of 1%.  Funds from the Paycheck Protection Program may ONLY be used to pay payroll costs, mortgage interest (no principal), rent and utilities, and interest payments on pre-existing debt (no principal).  The program is retroactive in an effort to bring workers already laid off back onto a company’s payroll.  Additionally, the CARES Act provides forgiveness of such loans up to a certain amount, provided certain criteria are met—importantly, amounts that may otherwise be subject to forgiveness will be subject to repayment if the borrower reduces its employees or institutes salary/wage decreases by more than 10%, thereby cautioning employers against layoffs.  Payments may be deferred for up to six (6) months.

 

C.     Insurance Policy Coverage

Businesses are wise to review their existing insurance policies for possible coverage triggered by the COVID-19 pandemic.  Policies such as business interruption, contingent business interruption, worker’s compensation, and commercial general liability all may be triggered by the revenue losses and business shutdowns associated with the current pandemic.

 

D.     Bankruptcy Reorganization

Often as a last resort, businesses may need to consider bankruptcy.  Bankruptcy protection has been expanded under the CARES Act, particularly with respect to Subchapter V filings under the Small Business Reorganization Act.  The CARES Act increases the maximum amount of debt permitted for a Subchapter V filing, raising the debt ceiling  from $2,725,625 to $7,500,000.00 while still offering the expedited procedures and reduced costs intended by  the Small Business Reorganization Act.  Further, , payments made to individuals pursuant to the $2.2 trillion stimulus package are exempted by the CARES Act from the calculation of current monthly income and disposable income, thereby allowing more individuals to qualify for Chapter 7 and Chapter 13 debt relief.

 

Rubin & Levin P.C. is a full-service business law firm and remains dedicated to actively monitoring the evolving developments relating to business financial resources during this time of crisis.  For more information or advice on about the above topics, please contact our firm.

 

DISCLAIMER: These materials are intended for general informational purposes only.  Accordingly, they should not be construed as legal advice or legal opinion on any specific facts or circumstances. Instead, you are urged to consult counsel on any specific legal questions you may have concerning your situation.

[1] Similarly, Executive Order 20-06, enacted on March 19, 2020, provides for a temporary prohibition on evictions and foreclosures until the end of the current public health emergency.

[2] Certain states have enacted strict regulations prohibiting any activity which would require a prospective debtor to leave their home and/or engage in face-to-face conduct.  Massachusetts has prohibited the filing of suits against debtors within the state while New York has enacted protections against the collection of state-owned medical and student debt.  Additionally, Senator Sherrod Brown has introduced Senate Bill S.3565 to amend the Fair Debt Collection Practices Act and provide additional protections for small businesses and individuals during the current crisis.  The bill has been referred to committee.