Where We Are and Next Steps Ahead for Business with COVID-19
In the age of COVID-19 and as the nature of our market economy, and the industries within, continue to change at rapid paces, businesses and lenders around the country are wondering what to expect and what options they have to weather this unprecedented storm. While many restructuring professionals and bankruptcy lawyers imagined a deluge of bankruptcy filings and insolvencies to immediately flood the court systems and economic landscape in May, it has been surprisingly quiet. Notwithstanding the millions of newly unemployed, and government mandated business suspensions, many business have seemed to narrowly avoid having to restructure at this time.
The primary questions drifting through many minds are how have vulnerable businesses continued to persist through this volatility? Will they be in the clear as a result of shrewd business practices or is this merely a postponement until their ultimate collapse?
One answer requires looking at the different institutions that have provided assistance in various forms. From a governmental perspective, federal and state administrations have feverishly worked to soften the economic blows by providing financial assistance with the extension of unemployment benefits and through the Small Business Administration’s Paycheck Protection Program (PPP). The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in late March expanded the ability of states to provide unemployment insurance to many workers affected by COVID-19. While each state can choose how to implement the CARES Act differently, in theory, states are permitted to extend unemployment benefits by up to 13 weeks. Moreover, CARES provided an extra $600 per week in federal unemployment insurance to supplement state unemployment benefits for eligible workers, which is set to expire July 31.
Additionally, the CARES Act contained the PPP loan program, which effectively injected $349 billion into the economy through small business loans. Recently, the terms of loan were updated to extend the original eight-week coverage period to 24-weeks, expanding the period for which loan recipients can use the funds and still qualify for loan forgiveness. These loans have allowed many businesses to remain viable and help workers continue to receive paychecks.
Both the extension of unemployment benefits and the PPP have helped the economy remain superficially afloat, providing a surge of money directly to businesses, workers, and those recently laid off. Beyond giving businesses and families longer runways for cash, these programs have enabled consumer spending in a way that otherwise would not have been possible allowing money to recirculate back into communities.
From a regulatory perspective, local municipalities have taken direct actions to keep individuals and businesses from sinking. Commercial and residential eviction moratoriums mandated by local ordinances have effectively created rent deferments, if not all-out rent reductions, to protect tenants. This has allowed many businesses to go without paying rent, one of their
largest overhead expenses, for multiple months. Whether landlords have chosen to allow rent forbearance for reasons of public relations, business judgement, or governmental requirement, this has undoubtedly allowed many businesses to stretch the money that they have kept on hand longer. Regardless, with many eviction moratoriums coming to an end at the end of July, businesses will soon be deciding if catching up on their rent is an economically feasible option, or if they will be forced into closure with debts far exceeding revenues.
On the private side, lenders have avoided loan defaults by proactively offering temporary loan forbearances to startups and small businesses. With the combination of extra money available from PPP funds and deferred loan payments, many businesses have strategically allocated funds to continue surviving despite declining revenues. The question remains of how long this will last.
There is no crystal ball to offer a definitive timeline, but many have projected there will be a catch up in the Q4 of 2020 and Q1 of 2021. While the relief provided by all these measures has not been insignificant, it is likely that they have simply delayed an inevitable wave of closures. Accordingly, as deferred rent and loans come due, and PPP and unemployment benefits dry up, the best positioned companies will be those who recognize the challenging times that lie ahead and act proactively. Now is the time to raise capital or find strategic partnerships, and creatively work to get ahead of payables. This might mean taking advantage of remote work-from-home options and begin engaging landlords to negotiate reductions in leased office space. Or, where reductions are not possible, to explore options of subletting unused space. Alternatively, this may also mean finely combing through expenses to reduce them to the greatest extent possible.
Regardless, it is incumbent upon companies to self-assess, engage professionals for tactical assistance, and plan for the long way ahead.
CMBG Advisors, Inc. is available in its capacity as a full-service restructuring company headquartered in Los Angeles, CA to provide you with strategic consulting advice.