The Impact of COVID-19 And The Servicing Of Your Business Loans

By: Randall A. Denha, J.D., LL.M.

There’s no question that the current COVID-19 outbreak is serious. Several hundred thousand people have been infected, and many have lost their lives. As a lawyer, the legal profession has had a new reality thrust upon it, as attorneys and legal professionals everywhere suddenly find themselves working from home in the virtual law firm they formerly thought impossible or impractical. The workplace has been moved from the office to a home office for most of us. The stock market has seen a rapid decline because of fear. Restaurants have closed. Fitness centers have closed. The level of disruption is nothing any of us have seen. The good news is that worldwide efforts are underway to contain the disease and many companies, such as banks, cellular companies and others have agreed to reduce and/or forbear from collection activity during this critical time.

With all of the above, if you’re a business owner, you might be affected negatively or positively. Either way, you should do what you can to keep yourself and your employees safe. Over the past few weeks, I have fielded a significant number of calls from worried business owners on what to do about declining revenue, workplace disruption and options for dealing with creditors. From the unfortunate past experiences of some clients and my involvement in navigating the financial and legal quagmires they found themselves in, I’ve developed experience in assisting clients in this area. As such, I wanted to share a few ideas and strategies in hopes of helping any of you looking for suggestions.

Many business owners have loans and are concerned with not only repayment, but servicing all of their other obligations and expenses without compromising the viability of the business or their personal lifestyle. While there are some industries who will not fare well during this time, there are still others who will thrive such as those in the online shopping industry, sellers of exercise equipment (think Peloton) or food delivery services.

COVID-19 has interrupted the world economy. Businesses with financial obligations to creditors will be impacted. As such, business loan repayments are and will (the longer this extends) become a serious issue. It’s easier to pay back a $5,000 loan than a $5,000,000 loan, but whatever the size, it’s important to know what options exist for managing finances during this time and options for repayment of the loan. Here are some ideas and strategies that can help a wide variety of small companies manage during these trying times:

Create or revise your budget: Every business needs a budget, even if it’s just some notes jotted down on a piece of paper. But it’s a far better idea to use budgeting or spreadsheet software that lets you visualize your upcoming cash flows. After all, how do you respond to a cash shortage if you don’t know the amounts of money flowing into and out of the business? Your working capital (current assets – current liabilities) is key; if it’s underwater, you’re fighting against the tide to keep your company afloat. To avoid drowning in a sea of unpayable bills, use your budget to make changes that minimize your expenditures and maximize your collections.

Minimize expenditures: Examine your budget for opportunities to cut your cash outflows. Start by speaking with your suppliers and ask about extending terms. If some won’t play ball, try finding replacements. Postpone non-critical purchases, slow down the restocking of inventory, cut back on employee work hours and in general avoid spending money for as long as possible.

Accelerate collections: You might be in a position to accelerate collections. For example, if you are due payments from commercial customers, try negotiating with them, perhaps offering a special discount for a quick payment. Another tactic is to apply for a merchant cash advance, in which you receive cash now in return for the remittance of upcoming credit card receipts. If you have any unneeded equipment, now would be a good time to liquidate it. You might want to wholesale your inventory through an auction to raise cash fast. If you get paid by the hour, perhaps you can work extra hours to increase revenue. If your business sells products or services that feature elastic prices, you might be able to charge more without losing sales volume. This is often possible when there isn’t any easily substitutable offering. Some companies can raise money by selling equity in the business to junior investors. This is a big step and should not be taken lightly.

Talk with your lender: If you’re having trouble paying back your loan, speak to the lender about resetting terms in a way that will work for you. It might involve extending the length of the loan, which cuts the size of the payments, even if the interest rate goes up. Perhaps you can arrange to pay smaller amounts more frequently. I have personally been involved in several (simple) calls with lenders on behalf of clients who have agreed to reduced payments or loan forbearances. Additionally, you might be able to adjust the payment date to one that better coincides with the timing of your collections. Communicate with your lender and do not avoid these communications!

In fact, on March 9, 2020, the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Consumer Financial Protection Bureau, National Credit Union Administration, and Conference of State Bank Supervisors issued a joint statement to financial institutions urging them to “work constructively with borrowers and other customers in affected communities.” They added: “Prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.”

It’s a reality that both bank customers and borrowers are going to experience financial difficulties due to the shutdowns, quarantines, and limited economic activity caused by COVID-19. The regulators’ statement provides banks space to assist their customers and help survive the economic effects stemming from the COVID-19 response.

The regulators do not make specific recommendations, but banks may want to prepare to offer borrowers payment deferral, extension, modification, or forbearance agreements. In these uncertain times, when no one is unaffected, banks dealing with defaulting borrowers need to consider what they “should” do and not rely solely on what they “can” do under their loan documents. Not every customer relationship is identical, and responses should be determined case-by-case.

Remember that a good lender is on your side, and will work with you to help you survive hard times. We are all in this together.