Expertise Beyond the Numbers

Assessing the Road Ahead for Small Businesses

Re-Routing Your Plans if the CARES Act Bailout Programs are Not an Option

As numerous small businesses receive word on their Paycheck Protection Program (PPP) applications or are waiting in the hopes there’s a round two of the stimulus bill; it is important to consider alternative options with or without the Small Business Administration’s (SBA) bailout funds. The latest question the SC&H Group COVID-19 Relief Team has been fielding relates to this exact consideration:

What if my business does not receive funds from the SBA bailout programs? What are my options?”

If looking at this as your business’ road ahead – maybe you missed the onramp for PPP – don’t give up; check your GPS for alternative routes to get your business back on the road to success.

A specific answer to the question above requires an understanding of your business’ pre- and during- COVID-19 details; however, fundamentally, there are five alternate routes business owners need to consider if they find themselves without the SBA’s help to get back on track.

Alternative Financing

If you have previously borrowed from regulated banks and can’t seem to refinance with your existing lender or another bank, you may need to consider a non-bank option. Examples include an asset-based lender, mezzanine lender, rescue financing, and factoring your receivables. While these are more expensive than your bank, they can be good temporary fixes.  A good investment banker can prove invaluable in pointing you in the right direction.

Navigate the Road Ahead Alone

Some organizations may find their solution is to have ownership put new money into the business, particularly if the business was sound before the pandemic and ownership believes the new equity is enough to get back on course. It is important to note, going it alone can be very risky for ownership, and this is especially true if the company was undercapitalized before COVID-19. Any new money that goes in as equity goes to the “back of the line,” behind all liabilities, therefore if you decide to proceed, be sure you understand the few ways to increase your chances of recovering your money, such as:

  • Rather than putting money in as equity, acquire a “last out participation” in the existing secured debt
  • Put your cash or other collateral up as additional security on an existing secured note in exchange for an over-advance

Ownership should seek legal counsel before making a new investment in the business, to be sure it is properly structured. For many businesses, unfortunately, this dramatic economic shock will create situations in which the previously discussed options may not provide for the long-term health or viability of the business or allow it to operate in the manner in which it had previously.  As such, owners may now need to consider several options which were not in the near-term plan before COVID-19 struck.

M&A Considerations

There are a few avenues an organization can take if the future of the business is reliant on more than an influx of new cash from borrowings, or if those borrowings aren’t available.  Possible M&A strategies that an investment banker can find and structure for you include, but are not limited to:

  • A divestiture or carve out of a division to raise funds and allow the remaining business to thrive
  • Raising equity or partnering with another firm to strengthen the balance sheet and create liquidity and or “de-risk” the business
  • An outright sale of the business to a well-capitalized buyer that can preserve the legacy and fund growth

Some good businesses that didn’t have underlying issues were just unlucky to be in the wrong place at the wrong time and will be crippled by this pandemic. In order to survive and regain their positions as strong employers, customers, and suppliers going forward, they may need help from existing creditors.  With a good restructuring professional and or bankruptcy attorney advising you, you can drive out of the darkness and back into light.

Restructuring (Out of Court)

When it comes to reorganizing your liabilities, if you have a relatively small number of creditors, you may be able to accomplish this by getting consent from your creditors, one at a time, without a formal process like a  bankruptcy. A good starting point here would be for a business to reach out to its current bank and ask about options to extend or restructure current loans. As important is talking to your landlord and other lessors about restructuring lease terms and talking to trade creditors about accepting payment terms on outstanding liabilities.

You’ve probably already started down this path with a short-term plan; it is essential to also start considering your longer-term plans. For example – if you were struggling before the economy got sick, don’t restructure for 3 months, restructure for 3-5 years.

Filing for Bankruptcy

Naturally, the last resort for most owners, and the final one on our list, is the possible need to seek a qualified bankruptcy attorney and consider filing Chapter 11. This becomes necessary if a large and unwieldy creditor body makes the prior option, restructuring with consent, difficult or impossible to achieve. Chapter 11 bankruptcy is a useful tool to consider where there is a solid underlying business to save, but it can be very expensive and time-consuming.  Fortunately, two recent pieces of legislation have mitigated this considerably and are important to keep in mind if this is the solution your business needs to consider:

  • The Small Business Reorganization Act(SBRA), or “SubChapter V” of Chapter 11 of The Bankruptcy Code was implemented in February to help alleviate issues including high costs, monitoring requirements, and procedural roadblocks that small businesses (liabilities of $2.75 million or less) were facing when filing for protection. Essentially, the program streamlined existing bankruptcy procedures and provided new tools to increase a small business’ ability to achieve a successful plan of reorganization.
  • The CARES Act has pushed the previous debt limit of $2.75 million to $7.5 million for cases filed on or before March 27, 2021, opening this option up to many more businesses.

Overall, there are ways for businesses to get where they want to go with or without bailout funds from the CARES Act. It is determining which route to take that may feel like added angst in an already uncertain operating environment but being proactive and taking action is better than driving with your eyes closed.

The paths above provide possible short and long-term solutions to strained businesses; however, before choosing from these routes, a valuable exercise would be to examine your business pre-pandemic. Was it undercapitalized before COVID-19?  Or are your challenges truly driven by this single event? Your answer to these questions may steer you more towards one solution versus another.

As you are navigating towards a bright future for your business, we are here to help, whether that be working with you to find a solution or introducing you to the best resources outside of our firm to get your business back on track. Please contact us if you have any questions.