The pandemic has been tough on small business. Almost 79 percent of these businesses suffered a moderate to large negative impact during the last few months, according to an Aug. 2020 U.S. Census Bureau small business pulse survey. There are many options, besides bankruptcy, that can help business deal with their debt and avoid business litigation.
The federal CARES act provided some relief through the Paycheck Protection Program and Economic Injury Disaster Loan program administered by the Small Business Administration. However, these loans may be exhausted, and Congress has not yet approved any additional programs or extensions.
There are other low-cost small business loan programs such as the SBA’s Economic Injury Disaster loans, the Federal Reserve’s Main Street Lending Program and Community Developmental Financial Institutions Loans. But owing money on loans in an uncertain economy may be unreasonably risky.
Lines of credit
Lines of credit, issued to small business and typically backed by a personal guarantee, allows business to draw funds as the money is needed. Their use has grown over the last few months. But these loans often have high interest rates.
Debt renegotiation provides more flexibility in bankruptcy, especially if the business has assets. Business should determine whether there are business assets that can be sold or used in negotiations with creditors. Review whether cash flow is sufficient to keep business afloat during this environment.
Business generally has two bankruptcy options. Chapter 7 liquidates a business and the proceeds are used to pay off outstanding debts. The business can no longer operate but its debt is extinguished.
Chapter 11 is a reorganization of business debts. Creditors develop a payment plan, sometimes at a reduced amount, while the business remains in operation. Debtors must complete credit counseling and filing fees may be costly.
Chapter 11 is an option if there is a chance that the business may become profitable again. A business may spread administrative fees over three to five years instead of having to pay them upfront.
Bankruptcy has disadvantages. It can stay on business and personal credit reports from seven to 10 years. If business and personal assets are intermingled, it is difficult to meet bankruptcy court requirements on identifying these assets.
An attorney can explore reasonable options for your business. They can help assure that rights are protected.