As the pandemic recedes, small businesses face a new scourge: debt collectors

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The worst of the pandemic may be over, but many small businesses are headed for a calculation.

While relief efforts like the Paycheque Protection Program (PPP) and as state and federal protections such as moratoriums on evictions begin to expire, businesses that may have limped or on the edge may soon tip over.

Or as Bob Keach, head of Bernstein Shur’s corporate restructuring and insolvency practice, puts it: “Expect a total avalanche of bankruptcies soon.

It sounds counterintuitive, but “deposits tend to be at their highest early in the recovery,” says Keach. A bankruptcy filing is actually a court order that governs how an insolvent debtor, who may be a business owner or an individual, will deal with unpaid obligations.

Why would more businesses choose to file now–in a recovery–it all boils down to options: “Debtors want to deposit when they have options, and creditors cause deposits when they have options,” says Keach.

In times of stagnation, especially at the bottom of an economic curve, not much happens because not much can happen, says Keach. Lenders are not altruistic in allowing you to delay payments; they want to be paid. (There is an industry term for this: stretch and pretend.) But because their hands may have been tied during the pandemic by authorities or because they know that forcing a business to liquidate for a period of time. crisis could be a PR mess, they stop, Keach says. With time and an easing of conditions, they will act.

Debtors themselves may delay applying for protection until recovery, as they will likely have more sources of credit. Waiting for the economy to improve can give companies some flexibility in restructuring or refinancing legacy debt, says Keach. Plus, if a restructuring involved an injection of new capital, he adds, it would be easier to sell to lenders if your business has better prospects.

Traffic signs

The first signs point to the push that Keach is predicting. Namely, the number of subchapter V bankruptcy filings is increasing. Subchapter V – so named after the section of the United States Bankruptcy Code that it inhabits – marks a fortuitous bankruptcy reform for small businesses that became law in February 2020, just before the pandemic. Authorized by the Small Business Reorganization Act, 2019 (SBRA), Subchapter V makes the reorganization or liquidation cheaper and less time consuming for small businesses than the traditional Chapter 11 reorganization filing. The number of such filings increased by 55% in February, 59% in March and 112% in April 2021, compared to the same months in 2020, respectively.

In addition, the Federal Reserve, in its latest semi-annual report on monetary policy, released in February, noted that “corporate debt is now near historic highs.” The central bank added that as such, “the risks of insolvency in small and medium-sized enterprises, as well as in some large enterprises, remain considerable.”

Globally, corporate bankruptcies – that is, companies reporting economic hardship – are expected to increase by 26% this year, with the annual tally reaching 9% in the United States, according to a forecast of March of Atradius, an Amsterdam-based credit insurer. This marks a significant increase from 2020, when insolvencies fell 14% globally and 5% in the United States.

Behind the fall

Over the past year, in the face of unprecedented health and economic crises, millions of businesses have requested federal assistance in the form of PPP loans, Economic disaster loans, and Main Street Loan Program ready. They also sought out traditional loans backed by the Small Business Administration which – thanks to the Economic Aid Act, which passed in December 2020 – have been softened to include a temporary cessation of fees and interest, and grants. payment up to $ 9,000 until September 30 or while funds last. All in all, the SBA distributed over 1,000 billion dollars in aid in its various programs since the start of the pandemic, according to Bill Briggs, the former director of the SBA’s access to capital office. He adds that the SBA has even more lending power in times of crisis.

This is in addition to the pre-pandemic debts of business owners, which may have increased during the outbreak. On average, Home equity line of credit Small business owners’ balances jumped 3.4% between February and May 2020, while those of all individuals fell 0.6% during the period, according to an analysis of individual consumer data. New York Fed Credit Panel and Equifax Trade Database.

While some debts, like PPP loans that end up receiving a discount– will not need to be repaid, forgiveness itself remains a big open question for millions of borrowers. The SBA has helped underwrite more than 10 million PPP loans worth over $ 780 billion since last April. It is likely that some of these loans will not be canceled, says Melissa Peña, president of the bankruptcy and creditors’ rights group at Norris McLaughlin in Bridgewater, New Jersey. In this case, she adds, “since the PPP might not be canceled, a company might have to pay off that debt.”

Plus, there’s a clock on just about everything else. “At the end of the day, people have to start paying off,” says Mike McGinley, executive vice president of small business banking at Live Oak Bank in Wilmington, North Carolina. The ability of businesses to bear that repayment depends on how the economy reacts, adds McGinley, who notes that an economic boom could help homeowners pay off their debts. But this is not guaranteed, especially since the the recovery has been uneven for many industries. “It’s still a bit of a wait for small businesses,” he says.

Difficult choices

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Business owners like Priscilla Luna of Today’s Business Solutions are already making major changes to adapt to new financial pressures. To pay off a $ 750,000 line of credit that she used at the height of the crisis, Luna says she is selling her business building, which served as both a showroom and warehouse for his company, a Houston-based office supplies, furniture and technology reseller. . The initial payment? A considerable amount of $ 200,000. “This location has given us more credibility with customers who have visited us,” says Luna. “It will be a difficult change, but we have to do what we have to do.”

The line of credit, according to Luna, was a lifeline in 2020. While Today’s Business Solutions recorded $ 30 million in 2019, the company lost more than a third in 2020. Despite securing a loan PPP in the first round, Luna says she always had to draw on the line of credit to pay for everything from health insurance to employee salaries. During that time, she had to fire six staff, including members of her own family. “It was probably the worst day I have ever had,” she said.

Some founders are fortunate enough to be able to use grant money to pay off debts related to the pandemic. Sara Dima, co-founder of R&D Foods, a prepared foods and specialty grocery store in Brooklyn, says she uses it Restaurant Revitalization Fund a subsidy to pay salespeople, which she postponed last year when her company’s revenues plummeted. And some of what remains, which she refused to disclose to Inc., will take out another small loan that she says has a high interest rate.

“I could also pay us, as owners, a little more,” says Dima. “There were weeks in the past year where we barely took a salary so that we could pay the payroll, pay the vendors, pay the rent, etc.”

If you are having difficulty repaying your debts, there are extrajudicial measures, including negotiate directly with suppliers and lenders, which Peña says remains a possibility these days. “I see negotiations and forbearance agreements,” she said. For others, a formal reorganization may be in order, although Peña stresses that it should only take place after exhausting other options. “Usually we take it as a last resort,” she says. “It’s expensive, and it takes a lot of time, and takes management time and business time.”

If you must, however, at least subchapter V bankruptcy protection, under the SBRA, offers for pain relief. “The reorganization law is a bankruptcy system,” says Nick Oberheiden, a federal defense attorney in Dallas. “It’s much faster and you have the same protections” as a traditional business bankruptcy proceeding, without a lot of inconvenience.

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