By Michael Liss, Esq.
Congratulations for surviving the first half of a year into a global pandemic. Have you tracked your business’ steps since the idea of a “lock-down” first circulated? Since you made it thus far and others did not, consider that you prioritized obligations. Prioritizing obligations is THE critical step all business owners can take to ensure survival through the chapter.
What is meant by an “obligation” when we speak of businesses? Something you must do to operate. In most businesses, main obligations include payments of rent or mortgage, payroll, equipment, insurance and other costs of doing business. However, not all obligations are built the same.
There are secured obligations and unsecured obligations. Secured obligations must often take priority over unsecured obligations. “Secured” means that collection of a debt is made simpler, as the loan is “secured” by collateral. Car loans are secured. If you default, the security for the loan, the car, gets repossessed.
The largest immutable obligation for most businesses is rent or mortgage. Rent is often a secured obligation when we speak about businesses, because so many commercial leases include a personal guarantee of one or more owners. For a business requiring a physical plant. this is the first obligation to mind. Luckily, this obligation is the most subject to negotiation. Whether you rent office space or own an industrial condominium, this is a great time to obtain better payment terms. Office space is quickly emptying, and no landlord in the present environment wants to lose a single tenant it can retain.
This is the time to approach your landlord, even if you’re making your rental payments easily. Landlords MUST give to hold on to their tenants in this market. If you are willing to extend your lease term, exercise an option or take any other action to make your landlord more secure as other business tenants go broke, you can surely negotiate new and better terms. The same if you own a building. This is because the cost of borrowing is so cheap right now, not only for you, but for lenders. A business which borrowed at 9% to buy a building at not too long ago can save several points on a refinanced loan. For many businesses, that can be the difference between closing and staying open. Likewise, a bank is borrowing that same money at less than 1% from the Fed, so lending at 5 or 6 or 7% is a great proposition for a lender.
Many companies are heavy on equipment contracts. Whether financing the purchase of a piece of expensive equipment or the lease of a fleet vehicle, these transactions are secured with collateral. The Federal Reserve has pledged to keep its lending at virtually free to banks for the indefinite future. If your equipment or fixtures were purchased a few years ago at 8% interest, the bank had best be ready to refinance at a lower rate to avoid a default. Imagine all of the breweries which have opened in the past 5 years with large loans for equipment. They’ve been selling no beer for a half a year, except for shipped items. If opening shop required a $1 million equipment loan 3 years ago and there is a 5 year interest-only balloon loan on all of that equipment, refinancing the remaining obligation to 5 or 6% may be the difference between making it through the next COVID phase or closing shop.
Personnel decisions have been tough for businesses. Utilizing contract (1099 or staffing agency) employees, rather than hiring permanent employees may be advisable.
This is an important time for many businesses to market and advertise, as the person-to-person marketing opportunities, such as trade shows, are on-hold indefinitely. Paying for the marketing efforts on a business card is likely not a wise idea, unless the business has a great lead on PPE at a discount. However, business loans for businesses which are holding firm or growing are loose and inexpensive. Although risky, quickly growing businesses are “factoring receivables”-which is a high-cost and terribly risking situation to avoid, unless on the verge of bankruptcy.
Bankruptcy filings are increasing and expected to continue to do so at an accelerating pace into the indefinite future. There is now a new small business reorganization provision which will streamline the process for many and many will utilize chapters 7 and 11. Often, bankruptcy is either the only choice or is a preferable specific choice, but the law of priorities applies to bankruptcy law. The secured obligations get paid first.
For most businesses, these times are challenging. For the readers, you’ve survived. Great, but take inventory of what has worked so far. Likely, you’ve prioritized to make things work. Moving forward, assess what needs to be paid in what order and what can be refinanced with cheaper money. Nobody knows what lies ahead, but these simple tips can only help you to survive COVID round 2.
Michael Liss, Esq. can be reached at firstname.lastname@example.org or (561) 981-2507, located in Boca Raton.