By: Timothy Dunn – Financial Services Lawyer
For many small business owners, the past year has been a frustrating exercise of navigating the bureaucracy of applying for government stimulus programs to simply survive until pandemic restrictions end and customers return.
As we appear to be on a trajectory to see businesses reopening to some form of new normal by the fall, both the federal and provincial governments appear to be looking to curtail and possibly end stimulus payment programs by late September or early October.
What happens then?
Well, in large measure, what happens will depend upon how a business owner has managed the finances of the business over the course of the pandemic.
- Has the business increased its debt load by taking on more credit facilities to keep the “lights on”? Unlike the 2009 and 2010 financial services meltdown, banks and other lending institutions have continued to make credit available to businesses and business owners during the pandemic. Further, absent egregious circumstances, there has been a general reluctance on the part of conventional lenders to enforce on non-performing loans. Optically, no lender wants to appear hard-hearted in social or conventional media for shuttering a business during a time of crisis. When the crisis is over, this attitude may be less charitable.
- Has the business financed its operations by failing to remit the required deemed trust payments to the Canada Revenue Agency (“CRA”) for employee source deductions and harmonized sales tax (“HST”)? Non-payment of these deemed trust payments is easier to conceal (at least initially), as reporting is done on a self-assessed basis. Failure to properly remit is only determined after a field audit of the tax payor or when triggered by an insolvency event. During the pandemic, CRA has not conducted audits with any regularity. Given the availability of government stimulus money coupled with lender hesitancy to enforce, the general suspicion in the insolvency industry is that there are a lot of businesses out there that are significantly in arrears of their deemed trust remittance obligations. When CRA restarts audits with a renewed vigour, these businesses and their directors (who are personally liable for deemed trust remittances) will need to consider what insolvency options are available to address this previously hidden debt obligation.
- Has the business kept current with its lease obligations? The past year has seen many landlords prepared to accommodate a struggling tenant by way of rent relief or modification arrangements. It is likely that a landlord will be receptive to a modified relationship rather than having a vacant space. However, there are limits. Landlords have their own creditors to keep happy. If you have relied solely upon pandemic eviction restrictions and not made payments under a lease or tried to pursue a reasonable accommodation arrangement - chances are the landlord will not be reasonable in return when the crisis abates.
As a small business owner, there are some critical dos and don’ts to consider.
DO NOT ignore your operating or other secured lender. This is a case where silence is not golden - it can be deadly. If an operating lender requests a required financial update or any other information that would ordinarily be required and it receives no response or continued delay tactics, the lender will ultimately lose patience and is likely to consider you a bad actor. It is always best to keep the lines of communication open even if the news is not good. A conventional lender will typically look to provide assistance to a borrower that it believes is honest and trustworthy. If the lender smells deception or a lack of cooperation - all bets are off.
DO NOT cash in your RRSPs to fund short-term operating losses in the hope that things will get better next quarter. Chances are they won’t, and you will now have an additional and unnecessary personal tax burden unless the RRSP monies are replaced within the prescribed tax period. Worse, you will have lost a previously protected asset and reduced your retirement fund.
DO be proactive in assessing the financial position of the business.
If adjustments need to be made to product lines, premises requirements, or the total number of employees reduced, it is better to understand these things before a lender, CRA, or an upset landlord make these choices for you.
DO seek advice from an insolvency professional on a proactive basis to ensure all possible restructuring options are assessed before they are limited or eliminated entirely.
In short, the last year has been hard and the totality of the economic hardship on small businesses is not yet apparent. My simple advice to any business owner is to proactively seek to understand all of your options in order to better plan for the future of your business and not be forced into the unenviable situation of reacting to choices made by your creditors.
If you have any questions regarding this article or have financial, bankruptcy, or insolvency inquiries, contact Timothy Dunn at email@example.com