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Protect Credit & Manage Debt Amid COVID-19

April 22, 2020
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Protecting Your Business in a Global Pandemic

Every business struggles to balance the money they earn with the money they owe, and the closures and restrictions necessitated by the coronavirus crisis have shrunk the former category considerably for companies across the country (and around the world.) Every small business owner now faces questions of how to continue paying the expenses they have, or whether to seek out additional means of credit to keep their business going. There’s a lot that goes into managing your debt and credit, and we’re here to help you make sense of it all. 

Frequently Asked Credit and Debt Questions During Coronavirus:

  1. FINANCING AGREEMENTS
  2. BUSINESS INTERRUPTION INSURANCE 
  3. REPORTING
  4. LENDER CONSIDERATIONS
  5. CREDIT CARDS
  6. OTHER OPTIONS
     

Financing Agreements

Understanding the terms and conditions of a loan is essential to understanding your obligations and options.  

What agreements should I be reviewing and what provisions do I need to be aware of? 

Nearly every small business owner must consider not only whether the money on hand is enough to pay their employees but if they’ll be able to make their payments on outstanding debts on time and in full and for how long. Those facing a financial shortfall should look at the financing agreement to see what the provisions of their loan(s) say about extenuating circumstances that may affect borrowing during a crisis.
 

What options to have as a borrower if I’m facing declining customer payments/sales? 

Business owners might be hesitant to take on additional loans or debt, given that there’s little clarity as to when the current economic situation might end. That’s why the government is propping up businesses with loans to help with payroll and expenses to see them through this period of downturn. 

Through the Small Business Administration, businesses can apply for Economic Injury Disaster Loans (EIDL) or loans under the expanded 7(a) loan program provided for under the Paycheck Protection Program (PPP). Although the programs differ — EIDLs are up to $2 million and offer $10,000 grants that don’t need to be repaid, while PPP loans top out at $10 million and offer the possibility of full or partial forgiveness — both offer a needed source of funds for businesses in distress.  
 

Can expiry dates for letters of credit be delayed? 

At present, there are no indications that expiry dates on letters of credit would be delayed, with banks and financial institutions remaining open even on a limited basis. Both borrowers and lenders should be aware that letters of credit and their expiry remain in effect. Check with your institution.
 

Should I consider negotiating with my lenders/clients? 

While lenders may vary on their respective policies on delayed or deferred payments and waived fees, it certainly doesn’t hurt to call and inquire as to any possible arrangements. Similarly, negotiating with clients on payments is something that might serve both parties in the long run; every business will remember those that helped them during the crisis, and a sure way to lose clients is to have them go out of business.  

 

Business Interruption Insurance

We take out insurance so that we’ll be protected in case of disasters, but our coverage may depend upon what’s in the terms of the policy concerning the current COVID-19 pandemic.
 

Can my insurance help compensate for losses?  

Business interruption coverage is in place to help protect businesses against lost income in the event of a natural disaster or government shutdown. And while the latter might lead you to think that you’d be covered under the current coronavirus lockdown in your area, many insurers created exemptions for viral pandemics in their policies after the SARS outbreak. This may lead to increased litigation. Therefore do not assume that you are protected,  be sure to check your policy to see if it has any such exemption. 
 

Will receiving payments trigger anything under my current financing agreements? 

Any payments made from business interruption insurance may trigger a mandatory prepayment, based upon the terms of the financing agreement. Thus, in addition to understanding whether you’re eligible under your insurance coverage, read any loan financing agreements to see if payouts are addressed.
 

Would the cessation of business be covered? 

Your potential coverage under business interruption insurance for the cessation of your business may depend upon whether that cessation is partial or complete, and whether it created a loss of income. Given that many businesses are shut down entirely by government directive, there may be a compelling case for a complete cessation; however, it’s again imperative to read your policy to see what’s covered and contact a lawyer.
 

Reporting

We try to project for the future we see for our business, but sometimes the unforeseeable throws our plans and projections into turmoil. 

Do I need to change my forecasts now? 

It’s safe to say that, for the time being, coronavirus is the new normal, and any return to the world that existed a few short weeks ago, economic or otherwise, is quite far in the future (if it’s possible at all.) Given that circumstances seem unlikely to improve dramatically in the near term, it’s advisable to create a new financial forecast for your business, to account for the decrease in revenue and cash flow that you’re likely to face in the coming months.
 

When do I need to start conversations with my lenders?

If you’re facing the very real possibility of not being able to make loan payments in the near future, it’s best to have a conversation with your lender(s) before you have a balance due and insufficient funds to pay it. Proactively reach out to your lender to see if they’re offering the ability to restructure your loan or defer payments for a time. Most lenders would rather get their money over time than deal with defaults. 
 

Lender Considerations

Currently, approximately 1,800 lenders are offering SBA 7(a) loans and the government administration recognizes that more banks are required to execute the new program. Smaller banks may or may not qualify to provide SBA loans and should reference the process and procedure on the SBA website. More information is available from Treasury and the SBA in the form of a guidance note that outlines the program and the terms of the loans.
 

Credit Cards 

Credit cards can help keep us going in a pinch, but we should be cautious about what we spend (and which card we use.)

Should I apply for or use a business credit card during this crisis? 

Relying on a business credit card to pay expenses when cash is low is one way for small businesses to stay afloat when other lines of credit are shrinking. A business credit card, particularly for those with good or excellent credit, is a stopgap during a time when revenue isn’t enough to cover costs, and should be a legitimate option for financially strapped business owners.
 

What options do I have to avoid high interest? 

One risk with credit cards is high-interest rates that make paying off the balance next to impossible. Before this crisis, there were several credit cards with zero-interest for up to one year. For business owners looking to apply for a business credit card, a bit of homework on available options and their terms and rates and benefits can help to find the right card that you can pay off in a reasonable timeframe and perks that you can use towards our business. Otherwise, you run the risk of building a balance that you can’t pay off, even when the economy picks back up.
 

What resources do I have to help make the right decisions?

Finding the right credit card may not be easy if you’re not familiar with all the available options or even business credit cards in general. Fortunately, there are many resources out there on what you should look out for with credit card offers
 

Other Options 

What options do I have to help pay my bills if I can’t access credit? 

There are a few different options for businesses that aren’t able to access credit to cover expenses. As part of its expansion under the Response Act, the Economic Injury Disaster Loans (EDIL) program and the Paycheck Protection Program (PPP)  are open to businesses that might not be eligible for loans elsewhere, with the option to apply for a $10,000 grant under the EIDL program that doesn’t have to be repaid. 

Businesses can also avail themselves of crowdfunding to help raise money while closed or seeing limited business. Businesses with a loyal following can ask for support from loyal patrons or offer gift cards for sale, given that many people are eager to try and help local businesses survive this crisis.    
 

Should I put any M&A plans on hold? 

Given that many companies are struggling to remain open and continue to pay employees, with poor markets; the decreasing availability of credit; and the need for businesses to try and keep themselves functioning, as well as a basic inability to meet with other people,  it might be advisable to reconsider whether to move ahead with any mergers or acquisitions in the near term. 
 

Is liquidating assets or bankruptcy a good option for me? 

Bankruptcy is a big step for any business, but it might be an option forced upon many in the face of grim economic realities. While only you can determine if bankruptcy or liquidation is the right decision for your company (with the assistance of a bankruptcy attorney), the process of reorganizing in bankruptcy has been made easier; the Small Business Reorganization Act of 2019 (SBRA) Small Business Reorganization Act of 2019 (SBRA) makes it easier and less expensive to reorganize, and the CARES Act expands the eligibility to businesses with a debt of up to $7.5 million. 
 

Should I apply for a loan? 

A loan is a great option for businesses without the means to keep operating otherwise. If your business doesn’t have any commercial loans available, you can take advantage of the newly expanded government loan programs through the SBA. 

The Economic Injury Disaster Loan (EIDL) program offers loans of up to $2 million at an interest rate of 3.75% (2.75% for non-profits), with a year of deferred payments and up to a 30-year term. The program also offers $10,000 grants that businesses can apply for, even if they don’t apply for an EIDL. 

The Paycheck Protection Program is an expansion of the SBA’s existing 7(a) loan program, and offers small businesses loans of up to $10 million, with the possibility of loan forgiveness based upon how much is borrowed and how much of the money borrowed goes towards payroll, provided that the borrower keeps employees on their payroll for eight weeks.        
 

Can I get an employee retention credit? 

The IRS and the Treasury Department introduced the Employee Retention Credit as a way to encourage employers to keep employees on their payroll. The credit offers a refundable tax credit of 50% of up to $10,000 in wages from March 12, 2020, to January 1, 2021. To qualify, a business needs to have been fully or partially suspended by government order, or their gross receipts must have fallen by 50% or more from the same quarter in 2019.  

Managing your credit and your debt during a crisis can be challenging, and there are a lot of issues to try and figure out. Talking with a LegalShield Provider Attorney can help you make sense of it all, and won’t sink you into debt; plans for your business start at $39 a month.
 

LegalShield provides access to legal services offered by a network of provider law firms to LegalShield Members through member-based participation. Neither LegalShield nor its officers, employees, or sales associates directly or indirectly provide legal services, representation, or advice. See a plan contract at www.legalshield.com for specific state of residence for complete terms, coverage, amounts, and conditions. This is not intended to be legal or medical advice. Please contact a medical professional for medical advice or assistance and an attorney for legal advice or assistance.

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