For every article and economist expressing confidence in the economy’s positive trajectory, corresponding dissenters predict a downturn. For business owners who always have one eye squarely focused on the future, uncertainty about where the economy is heading is frequently a source of anxiety and can make strategic planning a frustrating endeavor.
But whether it comes in two months or two years, an economic downturn of some degree is almost inevitable, as history has shown. And with political brinkmanship about the debt ceiling, rising interest rates, lingering supply chain issues, and generous pandemic-era accommodations, terms, and forbearances coming to an end, the economy is poised for challenges, to say the least.
Most prudent business owners understand that preparing for the worst is the best way to protect their company when tough times come. This means taking steps today to insulate your business from the impact of customers, suppliers, or tenants who may struggle to pay their bills in the near future. It also means understanding your options if your company finds itself behind the financial eight-ball.
As a full-service business law firm with a robust and varied bankruptcy, restructuring, and debtor-creditor rights practice group, Maddin Hauser works with companies across a broad spectrum of industries to develop creative and effective strategies for navigating economic challenges. While the following is not legal advice, these are some approaches that companies can consider when preparing for the coming storm.
For Creditors Concerned About Cash Flow
If a major customer files for bankruptcy, any payments they have made to you in the recent past for past due obligations may run the risk of being considered “preferences” that the bankruptcy trustee can attempt to claw back as part of the proceedings. To avoid having to give back your hard-earned cash, consider changing your payment terms to “cash on delivery” (COD) or “cash in advance” (CIA), regardless of what your prior arrangement may have been. COD and CIA payments may be insulated from preference liability because they are not received “on account of an antecedent debt,” they are received through a “contemporaneous exchange for new value.”
For Commercial Landlords Concerned About a Tenant’s Solvency
The very real threat of tenant insolvency and bankruptcy and the resulting financial fallout are why many commercial landlords ask for a personal guarantee or letter of credit as part of their lease agreements. So long as the guarantor has not filed for bankruptcy, the automatic stay in the tenant’s bankruptcy proceeding should not, under most circumstances, preclude the landlord from pursuing its remedies under the guaranty. And since a letter of credit is not the property of the debtor’s bankruptcy estate, a landlord may draw down on the letter without regard to the automatic stay.
For Businesses Staring Into the Insolvency Abyss
For many struggling businesses, the possibility or likelihood of insolvency leads them to seek bankruptcy protection and avail themselves of the breathing room and reorganization mechanisms it provides. Indeed, this is often the optimal strategy. But it isn’t always, and it isn’t the only solution for distressed companies. Several alternatives to bankruptcy may offer a better, and perhaps less expensive, path forward. These can include loan workouts and renegotiations, assignments for the benefit of creditors, receivership, or an asset sale.
Of course, there is no one-size-fits-all solution for distressed small businesses or one definitive way to prepare for an economic downturn. The wisest way to determine what is best for your business, whether as a creditor or a debtor, is to consult with an experienced bankruptcy, restructuring, and debtor-creditor rights attorney.
For more from Craig Zucker, visit the Maddin Hauser website.
