The Five Essential Steps to Keep Your Business from Economic Ruin During the COVID-19 Pandemic

Jordan Lipp, JD and Heather Lipp, CPA

As businesses face the economic fallout from the COVID-19 pandemic, prudent executives and business owners need to act fast to save their companies from economic collapse. Here are our five tips (from an attorney and a CFO) for executives and business owners to prepare their companies to have a chance to weather the economic storm, as well as a few more ideas on responding to the crisis. 

1.     Access Your Full Line of Credit Now and Request More. 

If we learned anything from the Great Recession in 2008, it is that in times of crisis, cash is king. Access your line of credit now. Don’t wait until you actually need the cash to pull from your line of credit. By the time you need it, it might be too late to access it. At the height of the 2008 economic crisis, some banks defied their legal obligations and refused to provide companies that had established lines of credit with credit. In times of economic crisis, you’ll want as much cash on hand to make payroll and to pay your bills. Your company needs a rainy-day fund, and more importantly, this fund needs to be accessible. Once the money from your line of credit is safely in the company’s checking account, there is no reason not to ask your bank to increase the line of credit. After all, the worst thing that can happen when you ask for an increase is that the bank says no.

2.     Check Your Business Interruption Insurance. 

Your company has insurance for a reason, and many (but certainly not all) property insurance policies include business interruption insurance. Whether your company has business interruption insurance, and whether that insurance covers the loss of income resulting from the coronavirus pandemic is a question unique to each insurance policy and to each business. The most likely companies to obtain insurance payments are those who civil authorities have ordered to be shut down, for example: restaurants, movie theaters, and amusement parks. Contact your insurance broker immediately to determine the broker’s opinion on what insurance may cover your losses. And, you and your attorney should take a look at your insurance policy to see what insurance may be available.

3.     Consider Renegotiating Your Lease. 

With businesses closing and employees working from home, landlords have perhaps not faced a crisis of this magnitude for nearly a century. Whether you know it or not, they are worried. Cash flow for your landlord is critical, and your business probably needs to reduce its fixed costs as much as it can. As such, you may want to try to renegotiate your lease for more favorable terms. Start a dialog with your landlord. After all, a tenant company that’s afloat and paying reduced rent is better for your landlord than a bankrupt tenant. Indeed, it is a common practice to renegotiate leases in times far less perilous than today. Potential points to negotiate are a reduction of base rent, an abatement of rent for several months, moving to a less-expensive space owned by the same landlord, and/or a reduction of operational costs (e.g., a reduction of common area maintenance charges).

4.     May the Force Majeure Be with You: Read Your Key Contracts. 

Are you worried that there will be disruptions in your supply chain? Are you worried that your vendors and contractors may stop providing services to your company? Or, do you need to stop providing products or services to some of your customers? As a legal matter, your ability to keep a party to a contract or to get out of a contract (other than through bankruptcy) depends largely on the language of the contract. While you should obviously be checking the termination / cancellation clauses, as well as the contract as a whole, don’t forget to pay close attention to the force majeure clause. A force majeure clause, also known as an Act of God clause, often relieves one or both parties of an obligation to perform their obligations under the contract if an Act of God (such as a pandemic) prevents the ability to perform the work. Read your contracts and consult with your attorney on the best course.

5.     Check Your Debt Covenants.

Most businesses rely upon loans, and typically these loans are accompanied with restrictive covenants on the business. For example, your loan documents may require your company to maintain positive cash flow and/or meet certain financial ratios of debt to equity or debt to assets. As your company’s income stream dries up in light of the coronavirus pandemic (hopefully for just a few weeks), you should make sure that you know whether your company is complying with the covenants of the loan. You want to be ahead of the issue, as the last thing that you want is to learn from your bank, as opposed to from your CFO or Controller, that you’ve broken a covenant. And, it always helps to have a good relationship with your banker. More often than not, keeping in touch with your banker and letting him or her know the general state of your business means that if you do break a covenant, the bank will be more likely to work with you on the issue.

Other Steps You Should Consider in the Immediate Future.  

These five tips are by no means an exhaustive list of the steps you should be taking, but they are hopefully a good place to start. Among many other action items, you also should be: keeping close track of your accounts receivable; preparing for the possibility of bankruptcies of suppliers and customers; considering building security with employees working remotely; re-evaluating cybersecurity in light of employees working remotely; working with your human resources department and your employment attorneys on the myriad of employment issues (from benefits to visas to layoffs); and, of course, taking reasonable steps to ensure the health of your employees, your leadership team, and your customers.

Consider Where You Can Invest.

              Once you have these steps under control, you should sit back and carefully consider how to make lemonade out of lemons. Economic downturns always provide opportunities for those ready to take advantage of them. Now may be the best time to invest in your company’s future. With the distressed job market, can you hire talent that would have been unavailable six months ago? Should you upgrade your app for home delivery in order to increase revenue during the crisis and provide better customer service? Is now the time to upgrade your fleet of vehicles, as vehicle prices are the lowest they have been in decades? If your customer base is currently at home with their eyes on the screen, is now a good time to run a major ad campaign? A crisis does not have to be all doom and gloom. Opportunities abound. 

How to Improve Once the Crisis is Over.

The current epidemic will subside, and eventually the economy will recover. And when the economy does recover, it is critical for your company’s leadership to learn from and act upon what your company learned in the heart of the crisis. To quote Winston Churchill on the lessons learned from the Battle of Britain, “success is the result of making many mistakes, and learning from the experience.” Once the crisis is over, you should be brutally honest with yourself and address where your company fell short. For example, were your IT, teleconference, and phone systems ready for everyone to work from home for an extended period? If not, consider upgrading them. Did your company have a sufficient line of credit? If not, make sure you obtain a sufficient line of credit. Was your sales pipeline lagging? If it was, devise methods and metrics to monitor the pipeline more diligently in the future. You should look at your company’s vulnerabilities to the COVID-19 shock, in order to fix these problems generally and be better prepared for the next shock. Someday, today’s rough economic times will be in the rearview mirror, and let’s not make the mistake of not learning from the experience.

Jordan Lipp is an attorney and a managing member of the law firm of Childs McCune, LLC in Denver, Colorado. He wrote the book on product liability law in Colorado, Product Liability Law & Procedure in Colorado (2nd ed. 2019), and he is also an adjunct law professor at the University of Denver Sturm College of Law. He can be reached at [email protected]. 

Heather Lipp is the Chief Financial Officer of Techtonic, Inc. in Boulder, Colorado. She has both an MBA and a Master’s Degree in Accounting, is a licensed CPA, and has done finance work for over two decades for companies ranging in size from start-ups to Fortune 500. She can be reached at [email protected].

The information provided does not, and is not intended to, constitute legal, financial, or accounting advice. Instead, all information provided is for general informational purposes only.