Your Money: Get aid or go bust? Small businesses face
dilemma
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[April 15, 2020] By
Beth Pinsker
NEW YORK (Reuters) - Sara Pauly is not one
of those small business owners scrambling to fill out paperwork for part
of the more than $350 billion in government aid available through the
Paycheck Protection Program or the Economic Injury Disaster Loan.
Instead, the owner of the Rufus and Delilah pet care business in Los
Angeles is scaling back her operation for now.
"I have decided to float the business with a personal loan in order to
stay afloat and not declare bankruptcy. Hopefully, I will not have to do
this for too many months. If so, I may need to re-evaluate my decision,"
Pauly said.
Many small business owners are in a similar situation, where even an
influx of relief cash will not help them stay afloat. The dilemma they
face is whether to seek aid or close up, often by going bankrupt.
Since small businesses often are tied into the lives of their owners,
personal finances are on the line, too. Many owners mix personal and
business expenses on their credit cards and use a house or other
personal assets as collateral.
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While there are plenty of ways for owners to forestall catastrophe, like
negotiating rent or mortgage delays, some businesses just do not have
the cash flow to keep things going.
"Business bankruptcies go hand-in-hand with personal bankruptcy," said
Carl Peterson, vice president of small firms at the American Institute
of Certified Public Accountants.
The first step is to do the math, and that will mean an immediate call
to your accountant, if you have one. Ask: "What is my revenue drop? What
will it be in the next three to six months? What will my fixed costs be?
What deferments can I get?"
"Then you have to figure out if that gap is going to be too large to
recover from," said Ian Weinberg, a certified financial planner in
Woodbury, New York.
Weinberg noted that for now programs like the Paycheck Protection
Program cover just a few months of payroll. One of his clients is a
dermatologist with his own practice - if the shutdown lasts too long, he
may have to close down and go work for a hospital system.
"He won't stop being a doctor, but he won't be employing people
anymore," Weinberg said.
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The skyline of New York and the Manhattan bridge are seen as the
outbreak of the coronavirus disease (COVID-19) continues in the
Manhattan borough of New York City, New York, U.S., April 10, 2020.
REUTERS/Eduardo Munoz
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PHASE OUT
Once you have assessed your cash flow, look at your solvency, says Scot Bishop,
a certified public accountant and financial planner in Houston. For instance, a
restaurateur with a loan coming due in May will have trouble refinancing.
"It's very important who owns the liability on your obligations," Bishop said,
noting that if you have personally guaranteed the rent or a loan, your own
finances will be dragged down, too.
This is the stage to bring in a business attorney, to sort out either how to
ramp down the business legally, or go into bankruptcy.
If you are a one-person shop, you "can go away with minimal effort," said Kashif
Ahmed, a certified financial planner in Bedford, Massachusetts. One of Ahmed's
clients put his business in hibernation for now.
If you have employees or other obligations like a lease, insurance or inventory,
then it gets more complicated.
Anyone with a business structure like an LLC or an S Corporation needs a lawyer
to do the proper filing to cease business operations, said Simon Hughes, a
business attorney in Houston. Otherwise, you risk being sued by creditors, and
you also risk your future business prospects.
Litigation is what brings bankruptcy to a head. "If there is potentially going
to be a big judgment against the entity, then bankruptcy is the only way to put
a stop to it," Hughes said.
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Otherwise, you may be able to negotiate a settlement with creditors, because
they realize that it is better to recover something like 70% of what is owed
than risk what they will get from a judge.
If your business is so small that you do not have an accountant and a business
lawyer on tap, there are resources available from the Small Business
Association, said AICPA's Peterson.
Services like Rocket Lawyer provide bankruptcy worksheets for free , but this is
not a very do-it-yourself pursuit.
"While business owners are legally permitted to represent themselves from start
to finish, that doesn’t mean being their own bankruptcy lawyer is a good idea,"
said Charley Moore, an attorney and founder and CEO of Rocket Lawyer.
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance;
Editing by Lauren Young and Dan Grebler)
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