Dealing with the Other Side of COVID-19 – The Revival of Small Businesses

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The adverse impact of the global pandemic emanating from the COVID-19 virus on small businesses undeniably has been extreme, with the full brunt possibly yet to be realized. While PPP loans (to the extent received), creditor forbearance, landlord extensions and lender cooperativeness have enabled some small businesses to navigate the uncharted territory of "shelter in place" and related government business closure directives, the most substantial hurdle remains on the horizon - namely, how and when will small businesses re-open when we all reach the "other side" of the COVID-19 virus?

Hopefully, further government funding and continued cooperativeness among debtors, lenders, landlords, vendors, employees and customers will form the basis for the revival of small businesses. Debtors should carefully prioritize debt repayment, prepare 13 week cash flow projections detailing short term revenues and expenses, revise (and revise again) these projections to account for actual events and circumstances, re-negotiate payment schedules, eliminate unnecessary expenditures, retain professional financial management advice and apply for each and every loan and grant made available. Another significant tool that is available to small businesses and their owners as a means of maximizing their business reopening goals is the recently enacted Small Business Reorganization Act (SBRA) which, by sheer coincidence, went into effect on February 19, 2020.

The expectation in the restructuring community is that insolvencies and bankruptcies will soon begin to increase rapidly. An executive director of the American Bankruptcy Institute was recently quoted as saying that we are currently experiencing the "calm before the storm of the financial distress caused by the COVID-19 pandemic". No sector of small business will avoid the effects of this financial distress. No matter what side of a transaction or debtor/creditor relationship, every party will be impacted by the financial fall-out arising from this pandemic. For these reasons, all constituencies should become aware of the SBRA and its likely presence in the future business environment.

The SBRA was enacted by Congress in order to provide a more streamlined and more affordable form of the Chapter 11 reorganization process for small businesses. Under the SBRA, the playing field between small business debtors and creditors favors the debtor side and presents challenges to creditors in protecting their interests in the reorganization of a small business. 

Notably, Congress anticipated the importance of the SBRA in the post-COVID-19 revival of small businesses, when it tripled the debt limit for small businesses as part of the CARES Act signed into law on March 27, 2020—just 5 weeks after the SBRA went into effect. The new debt ceiling for a debtor under the SBRA is now $7,500,000 until March 27, 2021, at which point it will revert to $2,725,625. This major adjustment will make the relief afforded under the SBRA available to substantially more debtors than was originally intended. Clearly, Congress (as well as insolvency lawyers and financial advisors) see the SBRA as an effective strategy to implement the reopening of the American economy and facilitate the recovery of certain small businesses on the other side of the COVID-19 pandemic.

The following are just a few of the advantages to a small business debtor filing a Chapter 11 case under the SBRA.

The above bullet points are merely some of the highlights under the SBRA from a debtor's perspective. Several other provisions exist and may have varying importance depending upon the issues facing a particular business. Clearly, the SBRA will be a useful tool for small business that is attempting to emerge from the unprecedented stall being experienced from COVID-19. Similarly, parties on the other side of a small business debtor should be prepared to understand and meet the challenges presented by SBRA.

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