As outlined in prior blogs, I discussed two primary business events that small market enterprises (SME) have confronted, embraced, and realized while operating under the COVID-19 pandemic: the impairment of basic balance sheet collateral and the global impact on manufacturing. These two basic business events adversely impacted more than 55% of all small businesses across the United States. This number is expected to get larger and even more difficult to accept as we move deeper into the storm called COVID-19.
As true professionals in the corporate financing arena, we all know accountants, investment bankers, private equity professionals, business bankers and many more individuals that are deeply committed to the financing and success of our country’s business owners.
I can say with a degree of certainty that there is a group of professionals that if not now, will shortly be very busy in the coming months: our friends, the bankruptcy attorneys. These qualified, skillful individuals will navigate our legal system and bring safe havens to many business owners by working through the night hours, seeking successful confirmation of their clients’ plans of reorganization. For many owners, the idea of filing Chapter 11 can be and will be the only way to save a business, a family, and our economy.
The Numbers to Date
The COVID-19 pandemic continues to wreak havoc not only on major industries but the smaller businesses that flow up to and support these industries. I’ve compiled a few points of data that grabbed my attention quickly:
Number of Chapter 11 Filings
|Industry||Jan – March 2020||April – August 2020|
Source : Cohen & Co.
Not surprising, retail suffered the largest increase of filings with restaurants not far behind. That said, both Congress and the Federal Reserve have acted quickly in providing much needed aid. The CARES Act has provided financial support for many business owners impacted by the pandemic. However, it is still unclear if this financial aid is simply a band-aid for a much larger, looming problem. Many business owners will be forced to make difficult decisions and be agile, embracing both global and economic change. If these changes are not addressed and incorporated into daily business operations, these companies will become part of the 2020 Chapter 11 reorganization statistic.
Another key element to any business is their ability to manage debt commitments. Banks are and will be bracing for a wave of loan, covenant, and financing obligation defaults. As a financing professional, I know how difficult these lender/borrower discussions can be when facing defaults. The banking professionals will handle each situation to the best of their ability and in the best interest of their institution and borrower. Factors such as an uncertain economy, our continued health crisis, civil unrest and the presidential election will only make it harder for business owners to raise cash.
Taking the Medicine
As more and more business owners sit at the kitchen table late at night, contemplating the fate of their business, many of them will be discussing the Chapter 11 reorganization plans with our friends, the bankruptcy attorneys. Although these discussions are painful, hard, and difficult to swallow, the business owner will have the same final question: is my business worth saving? Is the company still making active economic contributions to our country? Some will say “yes” and some will unfortunately say “no”. To the business owners that commit to reorganizing, this is a hard and big pill to swallow. It will require the agreement of many different parties throughout the legal process. One critical element in every reorganization, regardless of size, is the commitment and partnership from a capital provider. Many of us in the asset-based lending and factoring industry welcome and embrace the reorganization process and the role we can play in either debtor-in-possession (DIP) or exit financing. Either situation requires a lender that understands why the business is in reorganization, how the reorganization will help the business owner, and most of all, how the liquidity can get the business back on its feet.
As we eventually emerge from this catastrophic health crisis, there is one fact that will always remain front and center for the business owner… where there’s capital, there’s people who can and will lend it. For all of us, that makes the pill a lot easier to swallow.