The Covid-19 pandemic devastated many small (and medium and large) businesses. Closures. Limited hours. Fewer customers.
And while on-line ordering may work well for some companies, you can't fix a plumbing problem, or install drywall, or serve an omelette remotely.
SBA loans and EIDL loans helped. But what can you do when the money runs out? According to a survey from Goldman Sachs, small businesses have largely exhausted their federal funding and are starting to lay off workers, with many worrying about having to shut their doors for good. I'm assuming you've already brainstormed ways to maximize income and cutting expenses, and are here because those things just haven't been enough. Here are some thoughts.
Borrow Money. I put this one first, because sometimes it is the worst idea. Digging a deeper hole in the hopes that future developments may help you to fill it in generally isn't a good idea. And pledging your home as collateral to get the loan is usually even a worse idea. Having a spouse co-sign -- something that many lenders will require -- can be a disaster, since it may place your home, bank accounts, and other joint assets at risk. Before you consider new financing, review these factors from the National Federation of Independent Business. Take a hard-eyed look at the numbers. To be blunt, if you're only putting off the inevitable, you probably shouldn't borrow money to push back the date by a bit.
Think About Restarting. Assuming you have no personal liability for business debt (if you do, see below), closing your doors and opening a new business with a new name when things improve may be a good option. If the business has no assets, its creditors could sue and get a judgment, but there's nothing to collect from. Unless you signed a guarantee or committed fraud, you generally aren't personally responsible for debt incurred solely by the business. If the business is closing its doors, it generally doesn't need to and shouldn't file for bankruptcy. The reasons why are the topic of a separate blog. A new business has a clean balance sheet, no debt, and the experience you gained from running the current business. You do want to be sure that the new business won't be considered the "alter ego" of the current business. Get a new EIN, new phone number, new website, etc. You should speak with a good corporate attorney to make sure there won't be problems.
File for Individual Chapter 7, 11, or 13. If you are responsible for your business' debts (you are a co-signer on business debt, signed a loan guarantee, borrowed the money individually, or are otherwise personally liable for business debt) you may need to file a Chapter 7, Chapter 11, Chapter 12, or Chapter 13 to deal with your personal liability for the business debt. Most of my clients keep everything they have -- their home, their vehicles, their "stuff" -- and just wipe out their debt.
File for a Business Chapter 11. If the business can reorganize and keep operating if it restructures or eliminates its debt, a Chapter 11 may be the best option. Whether a "traditional" Chapter 11 or restructuring under the new Small Business Reorganization Act, designed specifically for small businesses, a business reorganization can shed unsecured debt (such as trade debt and unsecured loans), restructure secured debt (such as mortgages, vehicle loans, and collateralized debt), and get time to pay priority debt (such as taxes).
Dealing with business debt can be complex and difficult, and we have the knowledge and expertise to guide you through the process. Call or email us, and we'll be happy to talk about how to get out from under the weight of business debt.