COVID-19 Doesn’t Have to Mean Bankruptcy

March 17, 2020

By Amy Fitzgerald

Globally, millions of people are being economically impacted and directly affected by COVID-19. The widespread closing of businesses, schools, entertainment venues and other population centers have marginalized many employees and threatened many businesses with bankruptcy.

When mixed with historic stock market drops, an ongoing oil production war and other tumultuous economic factors, shutdowns—either government mandated or voluntary—will greatly impact small businesses and their employees. Significant impacts to larger companies that have more resources may take more time, but they certainly are not immune to the impacts of this pandemic. Workers without the ability to work from home are being forced to take time off to care for their children because of widespread school closures. This, too, will have a major impact on the economy where businesses and their employees struggle to pay bills and have less disposable income to pump into the economy.

As small businesses continue to maneuver the crisis, supply chains—predominantly originating in China—may dry up, leaving businesses and their customers without products. China, still recovering from the pandemic, and its factories simply are not producing and exporting enough materials to meet world demand. As China is the world’s major exporter and responsible for a third of all manufacturing, this only fuels a potential global economic crisis.

In addition to the manufacturing and workforce issues in China, the shutdown of Italy will most likely cause a significantly delayed financial impact. With a nominal GDP of approximately $2 trillion, Italy is the eighth largest economy in the world and has a huge impact on the European markets and industries. This is going to affect Europe and its largest trading partner, the United States, on an enormous scale. Spain has also declared an emergency, and other countries appear to be preparing to do the same. This will cumulatively impact every single industry with corresponding decreases in the markets.

With major trading partners being severely slowed down and producing less product, the United States is already feeling the financial effects, evident by the Dow having its worst drop since the crash of 1987. There’s talk of payroll tax cuts and help for hourly workers with the hope that they will allow employers and employees to survive the precipitous market drops. This does not, however, fully account for the ongoing shutdowns in the U.S. and the potential for shutdowns on a more drastic scale. Consider, for example, the number of schools that have switched to virtual learning. Because their campuses are emptying, there is no need for service workers, such as caterers and custodial staff, to continue working. Even if they are not laid off, they might not be able to clock-in and get paid. What about the camera, sound and lighting workers who had contracts for now-cancelled concerts and events? The list goes on. All of these workers will be out of jobs, saturate the employment market, and further push businesses into uncertainty.

With interruptions from major trading partners, internal shutdowns, cancellation of the events, a sudden influx of workers seeking employment and businesses competing to stay price relevant with contracts, along with the uncertainty of how widespread the coronavirus will be, it is inevitable for companies to see their bottom lines decrease. This is further magnified when looking at the wide scale fraud that is being committed around the world, allowing criminals to profit off of peoples’ fear of the unknown. Many larger corporations will feel the hit and be able to take it; many smaller businesses will not. 

While business interruption insurance can help mitigate and prevent bankruptcy, it is not a guarantee. Many people fail to realize that business interruption claims are for lost income (revenues – expenses), not lost gross revenue. Planning to operate on a smaller revenue basis can offset the oncoming losses, but now is the time to seriously consider restructuring plans before it is too late. Talk to your trusted business advisor or restructuring specialist today if you are concerned about the trajectory of your business due to the impact of COVID-19.

About Amy Fitzgerald

Amy Fitzgerald is a Senior Associate in the Financial Advisory Services providing commercial litigation, financial investigations, intellectual property disputes, martial dissolutions, and business interruptions services.