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As businesses start to slowly reopen in the COVID-19 world, they are facing new challenges; both externally and internally. Some examples of external challenges consist of government regulations, rising unemployment rates, lack of discretionary cash flow by consumers, and volatile economic markets. Examples of internal challenges consist of operational inefficiencies, human resource deficiencies, lack of resources to social distance in the work environment, and financial volatility, among others.  

The above-listed factors, and others, will result in businesses entering a difficult stage of their business cycle, wherein impactful decisions may have to be made related to the survival of the enterprise. Once the Paycheck Protection Program funds are spent and cash flow is assessed, one of the key factors of business enterprise survival may be dependent upon the communication between the business enterprise and its creditors.  

Prior to contacting creditors, the business enterprise should assess its current financial position and organize creditors into a hierarchy. Questions that should be asked by the business enterprise include, but are not limited to:

1. Who is the appropriate person on my staff to reach out to a particular creditor?
2. What are my largest payables?
3. How dated are my payables?
4. Who are my key vendors?
5. Can certain vendors be substituted?
6. What are the terms of payment for my payables?   

Once this hierarchy is developed the communication process can begin. Business enterprises should be transparent with creditors, acknowledge their struggles and cooperate to try to restructure the payment of payables. It is in the interest of both the business enterprise and the creditors to negotiate the terms of payment, as a bankruptcy filing by the business enterprise would be costly in time, resources, and the liquidated business enterprise’s assets may be below their fair market operating values. In summary, creditors may collect “pennies on the dollar” from a business enterprise in a bankruptcy.  

In trying to settle debt outside of Court, the business enterprise may negotiate a settlement plan with creditors that reduces or defers the payment of debt. Communication is important with both secured and unsecured creditors in trying to develop the plan. The goal is to solicit creditor approval for the plan and optimize short and long term cash flow usage for the business enterprise. This may necessitate numerous negotiations between the company and its creditors in order to execute this component of the action plan.  

In summary, as we get back to business, there are many character-building days that lie ahead due to the repercussions of COVID-19. Among the challenges, communicating with creditors to successfully restructure existing debt may be critical to the company. However, business enterprises have help. There are many financial professionals that have the knowledge and experience to help businesses navigate the challenges of the current economic market by implementing creative strategies that seek to stabilize a business enterprise’s financial position.  

If you would like additional information, please contact your Gettry Marcus Advisor or Gabe Shurek or Nicholas Backmann, the authors of this article.