COVID-19: How to Deal with Financial Distress – A Business Primer
As of the date of this article, in efforts to curtail the spread of COVID-19,
the governor of Pennsylvania has ordered the mandatory shutdown of all businesses that are not “life-sustaining
." Residents of
, and the
City of Philadelphia
are all under “stay-at-home” orders and many other states have issued similar restrictions. Companies in all industries are being affected and business owners must not only adapt and find creative ways to operate given this drastic shift in daily life, but they must also begin preparations for the inevitable economic impact of this disruption. Each business is different and individual approaches will depend on multiple factors. However, it will be helpful for companies to consider the following categories in determining what steps they should take to protect themselves and to try to reduce the negative impacts of this unprecedented crisis.
Vendors and Suppliers
- Availability - Confirm that vendors and suppliers are still operating and that essential goods and services are available and can be delivered.
- IT Capabilities - As working remotely is currently the only means of operation for most companies, it is vital that remote capabilities are being properly maintained and updated. Companies, especially those without internal IT departments, should confirm that external support is accessible and that the company is compliant with related licenses and agreements.
- Agreement Review - Supplier and vendor contracts should be reviewed for force majeure or other provisions that could allow suppliers to terminate or delay delivery. Payment requirements and deadlines should be noted and extension of payment terms requested as needed.
- Cost Reduction - In order to reduce costs, business owners should evaluate whether certain nonessential items can be limited or postponed or even if the related contracts or purchase orders can be terminated.
- Operational updates – Companies should check in to let customers know that they are still open for business and to inform them of any adjustments or limits to their service and means of operating.
- Assess Orders and Payments - Assess whether customers have stopped or limited their operations in order to ensure that there will not be any order reductions, cancellations, returns or payment delays.
- Delivery Dates and Deadlines - Businesses supplying goods or services should check delivery and appointment dates to make sure they can be met and should plan for and address necessary cancellations or extensions with customers.
- Agreement Review - Customer contracts should be reviewed and modified if required and, specifically, force majeure clauses should be evaluated to determine whether they can be applied to a company’s inability to perform.
- Track Status and Productivity - Keeping continuous contact with employees will not only help to reduce anxiety within a company’s workforce, but will keep businesses informed as to their employees’ health status, capabilities and productivity while out of the office.
- Available Manpower - Companies that are continuing to deliver physical goods need to ensure that they have the resources to produce, package and deliver those items.
- Legal Compliance - It is critical that companies are aware of wage and labor law requirements, related to (i) employee communications and notices, (ii) paid and unpaid time off, (iii) layoffs and termination, and (iv) related issues such as WARN requirements.
- Eliminate Non-Essential Expenses – Employers should evaluate whether certain expenses, such as non-essential travel, or certain reimbursements or allowances can be eliminated or delayed.
- Property Access and Restrictions - Review leases and communicate with landlords to determine what temporary restrictions have been placed on the property. Conversely, companies acting as landlords or management agents will need to keep tenants informed of such requirements. Depending on the local restrictions, tenants may not be permitted in the premises at all or only “essential” employees or a limited number of employees may be allowed.
- Negotiate Extensions - Note rent amounts and payment due dates under leases. Some tenants may need to negotiate extensions, waivers or amendments of leases both to allow for payment flexibility and to waive certain requirements (e.g., continuous operations requirements for retail locations).
- Subleasing, Assignment or Termination - Given the uncertainty as to how long companies may be implementing work from home protocols (and the long-term possibilities of terminating or laying off staff), some businesses may be in a position where they need to reduce or sublet space or terminate or assign a lease in order to move to a smaller or less expensive location.
Financial and Tax Review
- Available Cash Flow - Evaluate available cash flow for both the short and long term and consider whether there are any assets that can be liquidated.
- Cost Reduction - Determine which expenses should be reduced or eliminated.
- Tax Deadlines - Confirm that all property, employment, sales and use, and other tax filings and payments are up to date and consider obtaining extensions if required. The IRS has offered some assistance by extending the federal tax return filing deadline to July 15, 2020.
- Available Credit – Evaluate current financing and determine if it is necessary or feasible to draw on available lines of credit.
- Compliance with Loan Documents - Review loan agreements for all payment and maturity dates and confirm compliance with all financial and other covenants.
- Reach out to Lenders - Consider reaching out to lenders to discuss forbearance, extension and amendment options, as well as waivers of late fees or increases in credit limits.
- FDIC Guidance - In response to the COVID-19 crisis, the FDIC is encouraging banks and lenders to work with customers to provide coronavirus-related assistance, specifically to small businesses and companies in certain industries. Given this direction and the realities of the current environment, lenders will likely be amenable to such modifications and waivers.
- SBA Assistance – The U.S. Small Business Administration (SBA) is providing low-interest, long term working capital loans of up to $2 million to eligible small businesses and non-profits in SBA-declared disaster areas, including Pennsylvania, New Jersey and Delaware. These loans can be used to cover accounts payable, debts, payroll and other bills and economic damages caused by the Coronavirus. Businesses should look into the eligibility requirements and details of these Economic Injury Disaster Loans, as well as any available state programs.
- Review Business Interruption and Other Insurance Coverage - Evaluate specific clauses and exclusion language in insurance policies to determine whether losses resulting from the Coronavirus will be covered. Business owners are already reporting denial of business interruption claims, as insurers argue that this only covers physical property damage, such as fires. Companies may wish to consider filing a claim for business interruption as a result of governmental action.
- Proposed Legislation Requiring Coverage - Members of congress have recently reached out to insurance groups encouraging them to require their members to cover business interruption losses caused by COVID-19. Also, recent legislation proposed in New Jersey requires that losses related to the Coronavirus (for businesses with fewer than 100 full-time employees) would be covered by business interruption insurance and that exclusions of viruses and pandemics under such policies would not apply to COVID-19.
- Claim Submission – As this issue evolves, the most important thing a company can do in preparation to submit claims is to document all dates and losses and ensure that it is in compliance with all notification requirements under its policies. Businesses should also make sure that all premiums are paid and that they comply with all renewal and other contractual requirements.
- Consult with Counsel - Consult with counsel regarding debt restructuring options and to confirm compliance with all notice requirements, payments and other timeframes.
- Communicate - Communication with employees, customers, suppliers and shareholders is also key throughout the bankruptcy process.
It is unclear how long companies will be required to function in this new reality. Restrictions and requirements are changing on a daily basis and businesses are trying to adjust. The best way to navigate these uncertain times is for owners and operators to educate themselves as to the current condition and capabilities of their businesses, as well as the assistance and strategies that are available to help them move forward.