What an Economic Downturn Can Mean for Small Businesses

We are in an unprecedented global situation as COVID-19 makes an impact in every industry across the country and around the globe. The economic consequences of nationwide quarantines, business closings, and other measures to control the spread of this virus will not be fully understood for many months. However, it is clear that the impact of the coronavirus and the market trends that preceded this outbreak will affect the economy and result in an economic downturn and change in federal laws. It is essential that business owners understand the potential consequences of an economic downturn and work with a commercial bankruptcy attorney up to date in federal law to effectively prepare their companies.

Reduced Cash Flow

Cash flow is top priority of every company, and any change in incoming cash can have far-reaching effects on all business operations. Ideally, businesses would always be preparing for an economic downturn by managing their cash flow and having a plan if it was reduced. But when weathering an economic downturn, it can be challenging to operate a business with a dramatic drop in cash flow. In today’s economic climate, families are staying home from work and school and have virtually stopped spending money at local businesses. The economy is contracting in response. Many companies may experience reduced cash flow throughout this public health crisis and in the economic downturn that may follow, but owners can prepare by limiting budgets, eliminating discretionary spending, and creating engaging ways to stay in touch with customers who will most likely want to restart their previous routines. 

Credit Impairment

As a result of reduced incoming cash, businesses may find themselves in a financial situation where they have trouble paying off creditors on schedule. Failure to pay back debts on time can negatively impact companies’ credit and may cause lenders to take action. In many cases, a severe economic downturn prompts the federal government to provide assistance to small businesses through reduced interest rates or stimulus packages designed to inject money into a struggling economy and help companies pay off debts. Although businesses cannot always rely on the government in tough financial situations, the federal government has acknowledged the financial toll the coronavirus is taking on our nation’s economy and small businesses and has taken some action through the Families First Coronavirus Response Act and regulations propounded thereunder.

Staffing Changes

Businesses that experience a reduced cash flow or impacted credit during an economic downturn may need to face the difficult decision to change its staff. Whether this comes in the form of removing bonuses, not promoting individuals, or eliminating positions entirely, business owners may need to seriously consider the team they are able to support in an economic downturn. No business owner wants to lay off valuable employees, and adequately preparing for an economic recession may help bosses maintain their employees and encourage their business to succeed.

Reorganization or Bankruptcy

In some extreme cases, companies may not be able to sustain the financial losses of an economic downturn, and some small businesses may need to work with a bankruptcy attorney to develop a plan for reorganization or filing for bankruptcy. Working with a commercial bankruptcy attorney and considering reorganization or restructuring does not mean that a business will have to close its doors. Rather, a business that works with an experienced attorney at the first sign of financial trouble may be able to develop a strategy that enables them to maintain ownership of their business with some organizational changes.

Although the current health and economic situation can feel scary, business owners do not need to panic. Economic downturns are not uncommon, and most importantly, they are not permanent. Businesses who are concerned about their financial viability through an economic downturn may want to consult with a commercial bankruptcy attorney to explore their options and prepare for any outcome.

Businesses in Texas that are preparing for an economic downturn can rely on Dallas business lawyer, David Ritter. With over 25 years of experience helping companies reorganize, restructure, and file for bankruptcy effectively, David Ritter can help your business make a plan to survive an economic downturn. Contact the experienced team of attorneys at Dallas law firm, Ritter Spencer Cheng PLLC to learn more about what an economic downturn may mean for your business and how you can prepare.