Surviving COVID-19 as a Small Business
Surviving COVID-19 as a small business might seem like an impossible task right now, but you can get through it with the right mindset and a solid plan.
The more cash reserves you have, the more likely your business is to make it through. Financial experts typically recommend keeping three to six months of operating expenses on hand. However, this varies widely based on your stage of business. During periods of rapid growth, you may have less cash on hand.
The time a business can operate before running out of money refers to your burn rate. If you have less, or no, income because of the coronavirus pandemic, your burn rate will rise.
Slow the cash burn by educating yourself on how to free up capital and use the government programs in place to help small business owners stay in business during and after the pandemic.
Step 1: Re-evaluate your business strategy in light of the pandemic.
It’s not easy for most business right now, but those with a plan have a better chance of survival. First, look at your expenses for the immediate future. Do you need to furlough employees or lay people off?
As businesses are starting to re-open in some regions, it’s time to determine how you can make it through a recessionary economy. What does your cash flow look like for the next six months? What will happen if you re-open? Or if you can’t?
- Cut expenses?
- Increase marketing to drive more people to your business?
- Establish e-commerce or remote operations so that you can continue operating even if social distancing continues?
Step 2: Consider a best-case and worst-case scenario.
Now that we are more than two months into the global pandemic and the shutdown of all but essential businesses in most states, you should be able to evaluate where things stand if the shutdown continues.
If businesses start to re-open, will you be in one of the earlier categories to re-open? If not, how can you slow your burn rate, minimize expenses, and possibly even bring in revenue without opening your physical doors?
If you are slated to re-open, how can you do so safely? And how much will it cost to re-organize your storefront or restaurant or set up your business so that it is safe for customers? Can you rearrange aisles, displays, employee desks, or tables to enable social distancing if there are more than a few people in your building?
If you run the numbers and determine you still need financial help paying your mortgage, lease, or payroll, there are alternatives to explore.
Step 3: Explore ways to get a cash infusion.
If you realize your business won’t make it through the rest of the pandemic without assistance, it’s time to evaluate your options for a cash infusion.
You might consider invoice factoring, or borrowing against accounts receivable to get the money you need now. However, invoice factoring is rarely a good idea and worse in uncertain times. If your vendors don’t pay their bills, you still have to pay the invoice factoring company. Such measures can put you further behind on your finances.
You may also qualify for FICA deferrals. Under this program, introduced to help businesses in need during the pandemic, you can defer your portion of payroll taxes to free up working capital. You must pay 50% of the taxes owed by December 2021, and the balance by the end of 2022.
Finally, see if you qualify for the Employee Retention Credit. Under this program, you can receive a fully refundable tax credit equal to 50% of qualified wages up to $10,000 per employee. In essence, you may be eligible to receive up to $5,000 per employee that you keep on payroll during these challenging times, if you have experienced a decline in gross revenue in any quarter of 2020 compared to the same quarter in 2019.
Step 4: Apply for a loan through the Paycheck Protection Program (PPP).
You can see if your business qualifies for a loan under the Paycheck Protection Program (PPP). The PPP was included in the Coronavirus Aid, Relief, and Economic Security act (CARES). It offers forgivable loans to businesses with fewer than 500 employees to cover operational expenses, including payroll, lease or mortgage payments, and utilities.
Up to 25% of the funds used to cover operational costs may be forgivable and the entire amount of payroll may be forgivable as long as you use at least 75% of the money for payroll.
Loan forgiveness will be reduced if you decrease your full-time employee headcount or decreases salaries and wages by more than 25% for employees that made less than $100,000 annualized in 2019.
The loan will be forgiven if you retain or hire back your work force to 75% of its full amount (between February 15 and April 26, 2020) by June 30, 2020. PPP loans carry no fees and you can apply through a participating lender for as long as funds are available.
Step 5: Understand government bankruptcy protection programs.
Multiple laws have recently been passed to make the COVID-19 pandemic easier for small businesses to survive. Back in August 2019, the Bankruptcy Code was modified to include the Small Business Reorganization Act (SBRA). In February 2020, the SBRA went into effect.
It gives small business owners more time to pay off their debts when filing for Chapter 11 Bankruptcy.
While the protection program won’t bring in any revenue, it does allow you to restructure your debts.
It’s also worth noting that you can still file for bankruptcy after filing for and receiving a PPP loan. However, you can’t apply for a PPP loan after filing for bankruptcy—timing is very important when using these options together to save your business.
That said, what did the SRBA change?
Debtors with up to $7,500,000 in debt are now eligible to apply for bankruptcy. Before the CARES Act, only debtors with less than $2,725,625 were eligible. The SBRA also added Subchapter V to Chapter 11 of the Bankruptcy Code.
Subchapter V makes some significant changes that streamline the bankruptcy process and greatly increase the chances of successfully retaining your business ownership.
As long as you commit all of your company’s projected “disposable income” to paying creditors over a 3- to 5-year period, the remainder of your debt will be discharged, and you’ll keep your company. Unlike with a traditional Chapter 11 case, a disclosure statement is also not required, saving costs and substantial time.
Additionally, your payment plan will not require the approval of any of your creditors if it meets the other requirements for confirmation under Bankruptcy Code, eliminating a substantial impediment to plan confirmation.
Chapter 11 Bankruptcy under Subchapter V also presents with lower upfront costs as administrative expenses are paid over the life of your payment plan rather than at plan confirmation.
The biggest advantage of filing for bankruptcy after you receive your PPP loan, however, is that your creditors must stop attempting to collect payments from you. You will have time to renegotiate your credit terms, making it easier to survive the current economic crisis and keep your doors open.
If you’re considering filing for bankruptcy, you should always consult with a lawyer before taking action. Every attorney at The Pope Firm is an expert at filing for business bankruptcy in East Tennessee. We identify the best course of action for your small business and walk you through your options.
This pandemic has not been easy, but small business owners across Tennessee have plenty of options as the state begins to re-open. Don’t give up now. Talk to the experts at The Pope Firm to determine your best chance to thrive as a company as we face this new world.
The Different Types Of Bankruptcy
Depending on your situation, there are different types, officially known as “chapters” of bankruptcy, that you can file for. These different chapters of bankruptcy provide different results for different cases, and it’s important to have some knowledge on these chapters before filing for bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a commonly filed for chapter of bankruptcy and is intended for use by low to moderate income individuals with more debt than they’ll ever be able to repay. If properly executed, this chapter of bankruptcy can eliminate most or all of a person’s unsecured debt. If you’re eligible, Chapter 7 could be a great debt relief solution for you.
Chapter 13 Bankruptcy
Another great debt relief solution is Chapter 13 bankruptcy, that works great for people that aren’t eligible for chapter 7 bankruptcy. This chapter allows the debtor, or person that has borrowed money, to restructure their payment plans to be more manageable. At the end of this payment plan, most unsecured debts are discharged, or eliminated. This is sure to provide some much-needed breathing room for those people that feel in over their head, and are in need of some debt relief.
If you need assistance with personal or business bankruptcy and filing in Tennessee, reach out to The Pope Firm and Charles Pope, Attorney At Law.
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Frequently Asked Questions
Bankruptcy occurs when an individual, business, or other entity declares the inability to repay its debts. If you file for bankruptcy, that means that debt collectors must pause attempting to collect debts from you. Bankruptcy often allows you to erase most, if not all, of your debts.
There are two types of debts, unsecured and secured. Some examples of unsecured debts are credit card bills, medical bills, or taxes. Secured debts can include car loans or mortgages, which use the purchased item as collateral. In many cases, filing for bankruptcy can keep this collateral protected and prevent foreclosure of your home or repossession of other assets.
Bankruptcy is governed by federal legislation under the Bankruptcy Code, which falls under the greater United States Code. Both federal law and local law inform the bankruptcy procedure. Federal bankruptcy judges, appointed by the United States court of appeals, preside over court proceedings in these cases. In court, the judge and a court trustee, review your finances to determine whether or not to discharge the debts at hand.
Each state has one or more bankruptcy courts. Tennessee has six bankruptcy courts throughout the state.
Filing for bankruptcy can be a daunting process, and working with a firm with expertise in the field can provide you with necessary guidance.
There are several types of bankruptcy. Most individuals, married couples, and small businesses choose to file under Chapter 7 or Chapter 13.
What are the Differences Between Chapter 7 and Chapter 13?
The primary difference between these two types is that Chapter 7 bankruptcy allows an entity to fully discharge its debts in a short period. A Chapter 13 bankruptcy involves reorganizing debts and creating a plan to repay those debts over an allotted time. After that time, Chapter 13 eliminates most of the remaining debts.
Chapter 7 bankruptcy is typically filed by those with very limited income and unsecured debts, the most common of which is medical bills. Chapter 13 bankruptcy is most often filed by higher income bracket individuals and those with more assets, such as a car or a home. The motivation for filing Chapter 13 bankruptcy is often preventing assets from being repossessed or home foreclosure due to outstanding debts.
What Other Types of Bankruptcy Are There?
Two other types of bankruptcy are Chapter 11 and Chapter 12.
Chapter 11 primarily applies to larger companies and corporations, but sometimes it is the right choice for small businesses as well. Chapter 12 applies to those who are considered family farmers.
Various considerations get factored into who should file bankruptcy. Filing bankruptcy may be the right choice for you if you are overwhelmed by debt. Regardless of what type of bankruptcy you file, as soon as the process begins, you are granted an automatic stay. A stay is an injunction that prevents creditors from collecting any debts for an allotted time. An automatic stay halts the process of, for example, foreclosing on a home or repossessing a vehicle.
A Chapter 7 bankruptcy will discharge most of your debts. Filing Chapter 7 is appropriate for those who make less than the median household income in Tennessee and whose assets would not be at risk. In this situation, your non-exempt property is sold to pay off creditors.
Chapter 13 bankruptcy allows you to create a plan to repay your debts. If you have non-exempt property used as collateral in secured loans, you can restructure your finances to pay off any relevant debts over the next three to five years. Chapter 11 functions in a similar way, but is exclusively for businesses.
Filing for bankruptcy can provide a fresh start for those bogged down with debt, either by restructuring finances or discharging debts entirely.
How bankruptcy affects business depends upon the type of bankruptcy filed.
Businesses classified as corporations, partnerships, or LLCs can file Chapter 11 bankruptcy. Chapter 11 allows for debt restructuring, while the business stays open. As in Chapter 7 and Chapter 13, an automatic stay activates as soon as your bankruptcy period begins. In an automatic stay, creditors cannot try to collect money or other assets from you.
During this period, you work with your lawyer to restructure your debts and develop a plan to get your business back on track. This plan must be approved by some of your creditors and a bankruptcy court to go forward. You will be able to repay your debts over several years.
Filing Chapter 7 bankruptcy discharges all of your business’s debts by liquidating your assets. The entire process can be completed quickly, often in several months. Chapter 7 allows for the discharge of most debts, excluding government taxes and fines.
Only individuals can file for Chapter 13 bankruptcy. Thus, although businesses cannot file, you can file Chapter 13 as the sole proprietor of your business.
When you decide to begin the bankruptcy process, the first step is to find a lawyer who is an expert in filing bankruptcy in Tennessee. Hiring a bankruptcy lawyer can indeed be expensive, but it is worth the cost. This professional can guide you through what type of bankruptcy is best for your situation and what to expect throughout the process.
- Collect your documents: It is important to have everything from your paystubs to your credit report available before starting.
- Take the means test. This test will determine if you are eligible for Chapter 7 bankruptcy and help guide you in making a repayment plan for Chapter 13 bankruptcy.
- Meet with a credit counselor. In the state of Tennessee, most individuals must meet with a credit counselor from an approved provider before filing for bankruptcy.
- Fill out bankruptcy forms. If working with a lawyer, you can expect they will use online programs to help you file your paperwork.
- Pay your filing fee. It costs $335 to file for bankruptcy in Tennessee. Waiver of the fee is possible in some cases, but it is uncommon. However, it is possible to pay the fee in several installments instead of the entire balance upfront.
Declaring bankruptcy wipes out many debts, but not all.
What Debts are Usually Covered by Bankruptcy?
Bankruptcy can clear most unsecured debts, including:
- Credit card bills
- Medical bills
- Overdue utility payments
Bankruptcy can also clear many secured debts, but it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. For Chapter 7, you will have to give up any non-exempt items you put up for collateral. For Chapter 13, they will become part of your repayment plan.
What Debts Are Not Covered by Bankruptcy?
- Child support
- Alimony obligations
- Those related to personal injury or death in a drunk driving case
- Any debts not listed on your bankruptcy papers
No type of bankruptcy covers these debts. If you file for Chapter 7, they remain outstanding. Under Chapter 13, you pay these debts along with your other debts.
What Debts May Be Covered?
Bankruptcy rarely covers student loan debt. However, it may be in some cases with proof of undue hardship.
Tax debt is also rarely covered, but bankruptcy may cover certain old unpaid taxes.