5 ways to catch a break with lenders and suppliers during the COVID-19 pandemic

6 min read

Executive Summary

The U.S. economy has been hit hard by the global pandemic. In efforts to contain the further spread of COVID-19, widespread restrictions implemented across the country have left businesses of all sizes to cope with its consequences. In a recent survey done, liquidity was cited as a key pain point by small business owners in the U.S. with 52% cutting operational costs and 59% applying for loans to tide through this financially precarious period. If you are a small business owner looking to catch a break with lenders, suppliers, and vendors, here are 5 ways you can go about doing so. 

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1. Seek out financial relief from your local government or relevant organizations

On March 27, 2020, the U.S. President signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which contains approximately $350 billion earmarked to provide critical relief to American workers and small businesses.

This act includes the Paycheck Protection Program which provides 8 weeks of cash-flow assistance, via federally guaranteed loans, to small business owners to maintain their payroll. According to the Paycheck Protection Flexibility Act, if you use at least 60% of the loan for payroll, the entire loan will be forgiven. Do take note that the President has also extended the legislation of the program. As of July 6, 2020, the Paycheck Protection Program has resumed accepting applications and the new deadline is August 8, 2020.

Another important relief measure brought about by the CARES Act is the Economic Injury Disaster Loan and Advance. Qualified small businesses are able to apply for a low-interest loan or an advance of up to $10,000. The advance is specifically for small businesses experiencing a temporary loss of revenue and does not need to be repaid. Recipients do not have to be approved for a loan in order to receive the advance but the amount of the loan advance will be deducted from loan eligibility. Applications opened on June 15 and will be processed on a first-come-first-served basis.

In addition to the CARES Act, local governments and other organizations have also stepped up to bridge the funding gap for small businesses. For a comprehensive and regularly updated list of relief funding available to small businesses, do take a look at our COVID-19 funding relief tracker.

2. Look out for rental relief and try to work out a rental deal

If companies as well-established as Starbucks have also requested for rent relief, one can only imagine the burden of paying rent for small business owners. This is especially so if your business has a modest payroll and high rental costs, as the aforementioned Paycheck Protection Program has a 40% limit on non-payroll expenses.

We recommend finding out if your city has suspended commercial evictions and/or late rental fees. For instance, the Sacramento City Council has established a temporary moratorium on evicting commercial tenants who are unable to pay rent due to loss of income brought about by COVID-19. It is also worthwhile to find out if your city has reduced business taxes or taken any other steps to alleviate the burden of rent during the crisis.

Many cities across the country have established a temporary moratorium on evicting commercial tenants who are unable to pay rent due to loss of income brought about by COVID-19. It is worthwhile to find out if your city has suspended commercial evictions, late rental fees, reduced business taxes, or taken any other steps to alleviate the burden of rent during the crisis.

Next, open the lines of communication with your landlord. If you are able to do so, negotiate a favorable rental deal for both sides. After all, the landlord would most likely not want to spend the time, money, and effort to look for a new tenant during a severe economic slowdown.

3. Negotiate new terms with your suppliers and vendors and/or seek alternatives

Small businesses on trade credit with suppliers and vendors may be at risk of being unable to pay for goods and services. Get ahead of this by approaching them to negotiate new terms. Although times are tough for your business, we do not recommend attempting any hardball negotiation tactics as it is likely to backfire and undo the business relationship you may have nurtured for years. Additionally, it is likely that they themselves are also struggling during this unprecedented time, so your request for adjusted terms are more likely to be met with understanding.

Pausing the contract without penalties may be an option for you to put on the discussion table. If not, spend some time researching other suppliers and vendors whose pricing and payment terms may be more suitable for you for the time being.

4. Request loan forbearance or deferred payments

Forbearance is repayment relief granted by the lender or the creditor to temporarily suspend the payment of a loan in a specific time period. In light of the pandemic’s economic toll on finances, many lenders and creditors are offering special repayment options on a variety of debts from small business loans to mortgages. They may allow you to decrease or defer payments for up to 12 months.

Remember that there are no federal guidelines that specify what the terms for forbearance agreements should be. Thus, we highly encourage you to speak directly to your lender or creditor to find out what options are available to you. It is important to clarify the details of the repayment plan. For instance, will interest still be accrued during the deferral period? If so, is it the same interest rate? Will you still be charged late fees? How will your forbearance agreement be reported to the national credit bureaus? Will the agreement impact your personal and/or business credit scores?

We highly recommend speaking to your lender or creditor as soon as possible lest you miss a payment before an agreement can be reached and thereby compromise your credit standing.

5. Review force majeure clauses in your business contracts

A force majeure event is commonly referred to as an act of God or an event that is outside your reasonable control and prevents you from fulfilling your contractual obligations. A force majeure clause is found in most commercial contracts and if invoked, allows you to suspend or terminate your contractual obligations.

The force majeure provision will differ from contract to contract depending on how it is worded and the context of the contract’s legislation. There are three aspects to consider in this regard: if COVID-19 is considered a force majeure event, how the clause should be invoked, and what are the obligations of both parties moving forward.

You would need to review each contract individually and find out if the clause in your contract states epidemics or pandemics as a force majeure event. If not, all parties involved will have to decide on the interpretation of the clause and if COVID-19 is one such event. You will also need to find out what the requirements are for invoking the force majeure clause. Some clauses require you to give the other party written notice while some will be automatically invoked. If the clause is invoked, find out if your obligations are suspended for a certain period or if you are allowed to terminate the contract.

In the same pandemic survey cited above, it was found that over 80% of small U.S. companies expected the COVID-19 pandemic to affect their business over the next 12 to 16 months, while 90% are bracing for an economic slowdown. As the world’s health systems race to contain COVID-19 and develop a vaccine, there are steps that you can take to improve your business’s chance of surviving past the crisis.

About the author

Dexter Lam

Written by Dexter Lam

Dexter is the Growth Strategy Manager at Flowcast and Tillful. Living at the intersection of finance and technology, he is focused on building processes that enable business owners to more effortlessly gain access to financing and credit.

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