Surviving the COVID-19 economic ‘coma’: Why every small business should (carefully) consider seeking CARES Act relief
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“Like a medically induced coma.” That is how one policy maker I recently spoke with described the unprecedented economic disruption caused by the COVID-19 crisis.
Much like the intent behind its medical counterpart, the economic “coma” currently afflicting our nation is intended to preserve the health of our citizens while we address the virus that is its root cause. However, many small business owners (myself included) remain justifiably concerned about the equally devastating economic effects of these necessary disruptions. If you are one of us, this blog post is for you.
Today, the first round of stimulus checks reached millions of individual Americans in desperate need of relief. Small business owners wondering when their relief is coming will be pleased to hear there are good reasons to expect that the Coronavirus Aid, Relief, and Economic Security (CARES) Act may provide critical support for your operation.
As small business owners, we sometimes feel we have endured it all. Whether it is project delays, material shortages cash flow problems, rising insurance costs, or labor issues, if you can name it we have suffered through and overcome it. Maybe there were those in our lives who questioned our sanity when we chose this road. Maybe we even questioned our own. But if you are like me, after several years of weathering storm after storm, January of this year was starting to feel cautiously comfortable.
Then came the once-in-a-century pandemic crisis of COVID-19. In response, an intimidating array of federal guidance and executive orders mandated a voluntary freeze of our recently recovering economy. Not even the best positioned business could have adequately planned for this government-declared cryostasis of commerce.
For entrepreneurs like us, uncertainty is our playground. However, the uncertainty of the current crisis has tempted even the most seasoned crisis managers to despair. Due to the widespread government ordered closures, some businesses have lost their revenue stream entirely. Others are on the receiving end of government stays of collection and enforcement activity. Still others have suffered supply-chain disruptions hampering the ability to fulfill orders or stock shelves. A precious few essential businesses remain in operation, busier than ever, but worried about the future. All of us are wondering whether this necessary cure will have enduring and intolerable side-effects.
To counter the economic devastation of the government’s mandates, policy makers at all levels are scrambling to provide relief for small businesses. Many of these measures are found in the widely publicized CARES Act signed into law on March 27. Measures such as these make good sense, as more than 47% of the private workforce — or 58.9 million Americans — work for a small business, according to the latest figures from the Small Business Administration (SBA).
A useful summary of the CARES Act programs can be found on the SBA website at the following link: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options . Many other attorneys, accountants, lenders, and financial advisors have offered thorough summaries of these programs, so I won’t rehash those summaries here. Instead, I will simply note that, while these programs do not go far enough on their own, they are an important first step that small business owners should carefully consider taking to weather the current economic coma. In hopes that small businesses in my community will do just that, I want to address a few prevalent attitudes among many entrepreneurs, who I feel are missing this critical opportunity or failing to approach it appropriately.
In my work as a small business lawyer, I have spoken with many concerned entrepreneurs all over Hampton Roads and they mostly fall into three categories:
The first and most common category are those businesses already in crisis who are concerned that the CARES Act measures do not go far enough. Many of these businesses fear their lack of corporate structure or reliance upon independent contractors render them ineligible to benefit from available relief, such as the Paycheck Protection Plan (PPP). It is true that one of the main legislative priorities of the PPP was to incentivize businesses not to lay off their traditional non-owner W-2 employees. However, from my reading of the act, its authors did a good job ensuring that most business structures will be eligible for aid, even sole-proprietors and those relying upon independent contractors. While we currently lack sufficient data on the number of approved applications, the language of the act is enough on its own to inspire cautious optimism that relief should be available regardless of your business’s wage structure.
Many others in this first category have skimmed summaries of CARES Act programs and determined, without the guidance of an attorney, that the act does not expressly provide relief for their critical expenses. My hope for these businesses is that they do not simply dismiss these programs out of hand without seeking guidance from a qualified professional. These aid programs could help businesses restructure their expenditures and re-allocate money that would have otherwise gone to approved expenses, such as payroll, rent, mortgage payments, and utilities. This smart crisis-management strategy could be a game changer for cash-strapped businesses fighting to survive short (or dare I say longer) term loss of revenue. As such, any small business in this crisis category which is cynically ignoring these programs does so at their own peril
The second category of businesses I have encountered are those who have not yet reached crisis phase, but who view CARES Act programs as “free money.” It is true that the interest rates and repayment terms of these programs, including the Economic Injury Disaster Loan (EIDL) Program, are quite generous when compared with private lenders. However, these programs are intended to provide working capital to pay expenses the business could have paid had it not been for the current disruptions. They may not be used to replace projected profits or as working capital for purposes other than regular expenses. Many of these businesses may not qualify for relief at all, if they cannot demonstrate “substantial economic injury.” For those that do, I remain concerned that, without guidance from counsel, they will not document how CARES Act funds are disbursed in a manner that shows they were used only for approved purposes. Without good planning on this front, proving this after the fact could be difficult if not impossible and potentially undermine the small business’s ability to have the loans forgiven.
The third category are those entrepreneurs who view these programs as a bail-out that they do not need. While the first and second categories are the most common, this the third category concerns me the most. These folks are typically inclined toward self-reliance and cost-cutting to weather the storms they have suffered. They celebrate their capacity for sacrifice and crisis management and view seeking assistance as a sign of weakness. This attitude is shared, to some extent, by all successful entrepreneurs. However, I would challenge these hard-nosed commerce warriors to consider that this crisis is bigger than anything they have endured in their lifetime. This is not a normal economic downturn, nor did it result from a lack of planning or poor business management practices. The government is forcing our nation’s economy into a temporary slumber for public health reasons. Many entrepreneurs have spent years overseeing considerable economic activity and paying taxes that support our system. We should feel no shame in taking some of that money, our money, back at a time like this to keep people working. When all is said and done, the current crisis we are facing is a trade-off of a policy decision over which we have no control. Going into traditional debt or laying off workers to serve our pride will only weaken our businesses and, thus, our communities.
In summary, we lawyers enjoy the title of attorneys and counselors at law, as I am fond of telling my clients. Many are proud to call themselves attorneys but they do not give as much thought to their role as counselors. I have always embraced the second portion of our title. In that role, especially amidst this unprecedented crisis, preventative lawyering is necessary to seek creative solutions and avoid legal problems before they arise. In those efforts, I have become cautiously optimistic that prudent utilization of the CARES Act programs may help avert disaster for many businesses. However, this is a task weathered best with the support of a qualified professional, such as an attorney or tax professional, in your corner.
For that reason, our firm will be offering free one-hour crisis consultations between now and April 30, 2020 as a complement to your existing crisis management strategy. During this time, we can help you make wise use of the programs available and ensure that your (hopefully temporarily) limited resources are allocated in the most rational manner. Done properly, I am confident these programs can provide critical relief and help alleviate the substantial disruption your business is facing.
At the end of the day, we small business owners have worked countless hours and made untold sacrifices to serve our communities. Many of us also feel the burden of valued clients and employees who rely on us for leadership. For once the government has decided you do not have to bear that burden entirely on your own. I hope you will consider giving me a call today so I can help you weather this storm and protect what you have built.