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COVID Will Force Small Businesses to Resort to Bankruptcy.

Deep Recession and Lack of Resources: COVID will force Small Businesses to resort to bankruptcy.

The United States economy is likely to remain in a deep recession that economists say may linger for more than a year or more and small businesses will be hit hard. COVID will force Small Businesses to resort to bankruptcy.

COVID effects on Small Businesses

Retail businesses were already in a death-spiral before COVID hit with consumer buying moving to online e-commerce. Local businesses, no matter how much we might like to support them just can’t offer the convenience, section, and price that online stores can offer.

Restaurants were also in trouble with soaring rents, terrible working conditions, and a move to take-out with GrubHub, DoorDash, and Uber Eats. Margins on restaurants can’t handle the 30% “vig” these delivery services take out of each sale and restaurants can’t afford to be in the delivery game.

What Businesses Are Affected and Why?

In a survey by the SMB (Small and Medium Business) Group of more than 500 businesses, it found the COVID-19 impact varies by type of business, with these three categories most affected: personal service, hospitality, and retail. The smaller the company, the harder the hit, with companies with fewer than 20 employees most affected.

Why? Because a small business with fewer than 20 employees typically lacks cash flow and capital. Those companies were the first to reduce hours for employees or lay off employees. Those businesses were also the first to stop hiring subcontractors.

“Those businesses had a challenge, and will experience the most extreme negative impact,” said Laurie McCabe, SMB’s co-founder, and partner. “They had to learn how to serve customers in the new stay-at-home environment.”
McCabe said that continuing to operate has been impossible for small businesses that provide hands-on services, such as hair salons and spas, home improvement and repair contractors, and for many dental and medical offices.

Don’t Expect Consumers to Go Right Back To Buying

The White-House wants us to believe that immediately upon lifting stay-at-home orders, consumers will go right back to buying and employees will go right back to their old jobs with not even a hick-up. That just isn’t going to happen when the government can’t get its act together on testing and a vaccine may still be many months away. People just won’t feel safe going to stores and restaurants.

Small businesses have rent to pay – often to another small business that can’t afford to wait.

Revenues of Small Businesses Will Be Reduced Weighing on Their Ability to Pay Rent and Debt Payments.

If a restaurant is forced to keep distance between customers then its revenue is going to be cut in half or more. With reduced revenues comes reduced ability to pay rent and loan payments.

Rents must be reduced.

Retail real estate values simply cannot stay where they are today. If a retail tenant is paying $5000 a month rent but its daily shopping volume is reduced by social distancing rules, how can the retail shop afford to pay the same rent it paid before COVID. If the landlord chooses to enforce the current lease and evicts the store (and putting it out of business) what new business is going to come in at the old rent? And the same for restaurants.

If landlords and tenants can’t come to terms in amending leases, the small business is going to seek the help of the bankruptcy court.

Loans Must Be Worked Out

The same goes for loan payments. How can a retail store or restaurant pay monthly loan payments if its revenues are lower every month? Loans will have to be amended to suit the new business environment and if a bank and a business can’t agree on work-out terms, the business is going to seek the help of bankruptcy courts.

Small Businesses Will Struggle Before They Die

Small businesses are going to struggle before they finally decide to seek help in bankruptcy. They are going to use credit cards, raid the sales tax trust account, and cut costs.

It is inevitable that these short-term strategies will backfire making it worse for owners. COVID will force Small Businesses to resort to bankruptcy.

Help Is Here In The Form of The Small Business Recovery Act (SBRA)

Coincidentally, help is available with a new set of laws in bankruptcy designed specifically to help small businesses. The Small Business Recovery Act (SBRA) because the law at the end of February 2020 which simplifies chapter 11 bankruptcy for small business. There are some very important changes that can help a small business change the terms of a second mortgage that may have been taken against the primary residence, cram down SBA or other commercial loans, and more.

Bankruptcy Takes Planning – Don’t Wait Until The End

A small business shouldn’t wait until it is under the gun to look into bankruptcy. Bankruptcy for a small business often takes some pre-bankruptcy planning.

Don’t wait. Contact a bankruptcy lawyer licensed in your State now even if bankruptcy is far in the future.

For more articles related to COVID resources see our CoronaVirus Resource page. Restaurants see our COVID Restaurant page