5 Tips to Pay Off COVID Business Debt

Thanks to COVID-19, Elizabeth Clark’s business is $100,000 in debt. She owns Chair Decor in Vaughn, ON, which provides linens for professional event planners—a particularly hard-hit industry during the pandemic. Despite laying off staff, her business ran expenses of between $12,000 and $15,000 a month even while the warehouse sat empty. “We have no idea how long it’s going to take us to pay off this debt,” Clark told Global News in February 2021.

For businesses that have gone into debt during the pandemic, figuring out how to repay will require much time crunching numbers and looking for solutions. Here are a handful of tips business owners can consider to get ahead of the debt.

Tips to Consider

1. Evaluate your debt structure. Consider the debts you have now, prepare financial forecasts, and look at the potential for financing requirements. This can help you to understand your business’s possibilities for debt restructuring. It can also help in lender due diligence and negotiations, should you choose to pursue this route.

2. Restructure or sell part of the business. Is there a non-essential part of the business that you can spin off to create a cash infusion? The sale of part of a business—or the whole business—can help you to increase your liquidity. That might create the financial flexibility you need to save the core business or to start a new venture.

3. Sell assets and lease them instead. Depending on your company’s assets, you might be able to sell assets back to the vendor (for a quick cash return) and lease them for less. Paying a monthly rental fee could be cheaper, at least in the short term. If you bought the asset on credit, consult the credit agreement to see what’s possible.

4. Try negotiating with lenders. Sometimes it can be helpful to ask lenders to lower their interest rates or fees. Be prepared to present reasons and evidence for why your business will be able to successfully flourish in the future and repay the loans. Lenders may prefer to lower their interest rather than risk you not repaying the principal.

5. Consider all options. While it’s never anyone’s first choice in how to run a business, it can be useful to put all options on the table. That includes understanding your business’s possibility to file for bankruptcy or make a proposal.

Business Debt in the Pandemic

Seven in 10 small business owners in Canada have taken on debt due to COVID-19, according to a February 2021 report from the Canadian Federation of Independent Business (CFIB). The average debt now approaches $170,000 per business. Businesses in hospitality, the arts, recreation and information, and social services are the most likely to have taken on debt. That’s understandable, considering many of these businesses work directly with the public, can’t operate remotely, and may be considered non-essential during public health lockdowns.

The report asked businesses where they turned for financial help during the pandemic: government programs like the Canada Emergency Business Account (CEBA), Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) were at the top of the list. But owners also dipped into personal funds to save the business. Personal savings were used by 26% of businesses and credit cards were used by 24% of businesses to keep the doors open.

The Struggle to Repay

According to the CFIB report, 76% of the owners of indebted businesses predict it will take longer than a year to pay off the debt. In the worst-case scenario, some 11% of business owners are concerned they might not be able to repay.

The report included some anonymous comments from small business owners who suffered from financial challenges during COVID-19, including one by an owner of a professional services business in Nova Scotia, who wrote, “Our personal resources have taken a real hit…In addition to the government programs, we took on more debt, collapsed personal RRSP investments and refrained from taking owner salaries.”

Considering Future Growth

Entrepreneur Elizabeth Clark contrasts Chair Decor’s pandemic debt with the normal debt that businesses would take on for productive purposes—to buy inventory or equipment, for example. Clark took out a loan from the Business Development Bank of Canada and obtained financing from the Canada Emergency Business Account (CEBA) program. She hopes that the loans will keep her business running until the events industry roars back to life, though Clark worries the debt load will hamper Chair Decor’s future as the economy recovers: “How are we going to account for future growth within our business when all our profits are literally going to be paying back this debt?”

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