Your Small Business: Getting Through the Economic Turbulence

Part 1 of a 5-part series: Options for Small Business Owners in Financial Distress

Suppose your small business has been doing fairly well over the last few months in spite of COVID-19 and the many other factors affecting our economy. However, you are worried about the upcoming change of seasons, additional shutdown orders, or other circumstances which might adversely affect it.

Or suppose you expect to do well over the holidays even in the face of (or because of) the pandemic, but dread your normally slow months of January, February, and March.

Or suppose you recently undertook a large project which fell apart and left you owing a ton of money.

Different situations require different responses.

Specific Event

If a specific event led to your problems, but your business is otherwise profitable, you may be able to work out of them.

Equipment Problems

Imagine that your business was doing so well that you bought additional equipment and hired additional employees in order to meet the demand.

Unfortunately, your new equipment didn’t work as promised. Rather than the promised six weeks, the new equipment took a year to get up and running smoothly. In addition to failing to fulfill all of your orders during this time, you paid employees overtime to produce as much as they could despite the distractions caused by the equipment problems.

Assume that you always had been fully transparent with your bank and other creditors. You also enjoy a good reputation in the industry, having always operated with integrity.

And you take a pay cut to show that you are invested in the problem.

In this situation, you might be able to pull through, largely because of the reservoir of trust and good will you have built up. Creditors may continue to work you. Vendors may continue to sell your product (perhaps with more restrictive credit terms).

In such an event, you and your attorney might be able to reorganize your business without resorting to the courts.

Customer Files for Bankruptcy

Suppose you have a large customer that files for bankruptcy. Your first move should be to call your lawyer. There are steps you must take sooner rather than later including making a reclamation claim if possible.

After receiving a notice of a bankruptcy filing, don’t just give up. If your customer stays in business, do they want to continue working with you? Do you want to continue selling to them? You may be able to negotiate better terms, including COD, no discounts or obtaining collateral in exchange for credit.

Ask your attorney if the customer has deemed you a “critical vendor.” If so, you might be able to get paid for those unpaid invoices issued for deliveries before the bankruptcy case was filed

If you receive a demand for the return of a preferential transfer, don’t just pay it and don’t just ignore it. It is worth a call to your lawyer to discuss defenses that might be available to you.

Long-term Systemic Issues, Including COVID-19

If you’re having long-term, systemic issues (and the pandemic definitely qualifies as a long-term problem), there are a number of actions you might take. Although today might be a disaster, it also is an extraordinary opportunity to make tomorrow better.

As they say, cash is king. You will need it to stay open while you make the necessary changes to survive.

Check your processes and procedures for possible increases in efficiencies or reductions in cost. Be sure that you’re not over-staffed, and that your staff is actually good at what you need them to do. There are a lot of highly qualified people looking for work these days.

Your current problems also provide you with an opportunity to change your business model.

• Don’t miss the opportunity to update your product line or your methods. Be insightful and creative. You may need to pivot and use your expertise to meet current demands.
• For instance, IBM was the undisputed leader in computer design and manufacturing during the 1960s and 70s. However, other manufacturers jumped in with smaller, faster, lighter machines and IBM didn’t keep up. Today, it is just one of a number of players in the area.
• Guess who invented the digital camera? Kodak, the former giant in the film industry! But the company wasn’t forward-looking. It felt that film would be around forever. Now look where it is.
• Look at the changes in your customer’s buying habits and refocus your business to meet them. Check out what your competitors are doing. If you’ve been largely brick and mortar, look into improving your web presence. Who would have thought that buying clothes, or even furniture, online would ever be popular? And now, in the COVID-19 era, this is even more true.
• Involve your employees – they probably know the weak spots in your business better than you do. By seeking their input, you not only obtain information, but also create a more loyal staff because they feel respected.
• Consider hiring a consultant. Owners often become blind to developing problems in their business, so a fresh set of eyes might be called for. What is the true cost to produce each item you sell? Maybe some prices need to go up; maybe some unprofitable or poorly selling items need to be dropped.

Practical example: I actually was on the receiving end of 1) an improvement in customer service which 2) cost very little to implement. I returned some specialty light bulbs from a light fixture I I had purchased several years ago because they were burning out prematurely. The customer service representative acknowledged the problem and very graciously offered to send me some replacement bulbs.

When I received them, there were a few pieces of candy in in the box in a little paper bag imprinted with “Here’s to your bright future! Thank you!”

This little touch impressed me so much that I’ve been telling others about it. What a great example of standing out in the crowd at essentially no cost.

It’s easy to be paralyzed by the rush of things going on during financial distress, but all is not lost. There are many things to consider as you respond to your particular situation whether the problem is due to a single event, a customer’s crisis, or systemic or external long-term problems.

Here’s the rest of the story: When I wrote back to the customer service rep to compliment her on the candy idea, she told me that one of the owners received candy in an order from another company several years ago and decided to use the idea himself. The moral? You can pick up good ideas anywhere if you keep your eyes open.

This post is part of a series discussing options for small business owners in financial distress. In the next post, we’ll discuss analyzing and improving your business operations.

Here are the other posts in this series:

• Introduction: Options for Small Business Owners in Financial Distress: A 5-Part Series
• Part 1: Your Small Business: The Economic Turbulence – Analyzing and improving your business operations
• Part 2: Accumulating Cash and Improving Your Business’ Cash Flow – Analyzing and improving the business’ flow, as well as obtaining additional financing if necessary
• Part 3: Non-Bankruptcy Ideas for Helping Your Troubled Small Business –  Ideas on using non-bankruptcy options in an effort to restructure your debts
• Part 4: Bankruptcy Options for Your Troubled Small Business – Pros and cons of various types of bankruptcy
• Part 5.1. Getting Through Chapter 11 – Part One: After Filing – Getting through a bankruptcy case and coming out on the other side
• Part 5.2: Getting Through Chapter 11 – Part Two: Plan of Reorganization – Putting together your plan for reorganization and confirmation by the bankruptcy court

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years. 

Published in the April 2021 St. Louis Small Business Monthly.

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