Even though the PPP funding has dried up and we are entering the second half of 2021, there are still businesses struggling. The good news is that leaders still have many distressed businesses financing options.

Distressed Business Financing: Where to Look When Creditors Are Closing In

It has been well over a year since the pandemic began and hundreds of thousands of American businesses are still struggling to survive. When the Boston Consulting Group (BCG) analyzed U.S. businesses at the end of the second quarter of 2020, more than 60 percent were under financial or operational stress. Fourteen percent of companies were in distress, up 43 percent from the number of distressed businesses in 2019. 

And that was while the stimulus money was still flowing. As we move into the second half of 2021, distressed businesses can no longer count on financial support from the government. The Paycheck Protection Program is over, having distributed nearly $800 billion to more than 10 million borrowers.  

Now what? Leaders of struggling companies must look for new distressed business financing options. If creditors are bearing down, and business isn’t picking up quickly enough to keep them at bay, there’s no time to waste—but there’s also no need to panic. Bankruptcy may be avoidable. Distressed businesses still have a wealth of financing avenues available to them beyond government relief. 

Private Options for Distressed Business Financing

Every business is unique, and its unique circumstances largely determine what funding sources are available or advisable. Exploring a distressed business’s full financial picture and goals helps identify the specific financing options that could be a good fit for its needs. There are several avenues that may help distressed businesses find some relief. 

  • Asset-based loans When a distressed business can’t get approved for a traditional bank loan, leveraging its assets may allow the business to borrow much-needed capital. Asset-based loans are structured using a business’s assets as collateral, which is why this is a popular distressed business financing strategy. Even if a business doesn’t have much cash on hand, it generally has inventory, equipment, accounts receivable and other valuable property that can be used to secure this kind of loan. Limited cash flow and poor credit aren’t necessarily disqualifiers. 

    When asset-based lending is appropriate for a distressed business, these arrangements can be structured in a number of different ways. The same is true of other kinds of loan facilities. Sometimes a loan is structured as an agreement between one borrower and one lender (bilateral), but other times the agreement is made between one borrower and a group of lenders (syndicated). Again, each business’s unique circumstances determine the structure of any loans.

  • Commercial real estate loans Commercial real estate loans can be utilized by distressed businesses under a lot of different circumstances. Whether it’s a company that works in the commercial construction or real estate space, or a company that needs to renovate or refinance its property in order to keep operating, a distressed business may be able to secure a commercial real estate loan even if cash flow is poor. A number of loan types fall under the commercial real estate loan umbrella. For example, commercial properties like offices, warehouses, hotels, shopping malls and multi-family housing units may take advantage of commercial mortgage-backed securitized loans, or conduit loans. 

  • Tax credit financing Leveraging their tax credits is another way for some distressed businesses to raise capital. If the business is eligible for certain state and federal tax credits (like historic preservation credits), it may be able to sell any transferable tax credits to another entity that wants to lower its own tax liability. The distressed business will get slightly less for its credits than they’re worth, which may be an acceptable tradeoff for an influx of cash. 

  • Bond and public finance transactions Just as municipalities often issue bonds to raise money for expensive projects, companies may issue bonds to generate revenue quickly. Investors who buy bonds from a distressed company can enjoy a high rate of return if the company is able to recover, so there’s a robust market for distressed debt. There are risks and rewards to this particular distressed business financing option, but it’s worth evaluating. 

Don’t Count Out Government Money

While PPP money is no longer available, government loans may still be a viable source of relief for some distressed businesses. Small Business Administration loans continue to be an option for a broad range of American businesses. In addition to 7(a) and 504 loans, the SBA provides grants for businesses working in scientific research and community organizations. Distressed businesses may also be eligible for loans issued by quasi-governmental agencies. While these funding sources won’t be accessible for all companies, they could be considered while exhausting all of a distressed business’s financing options. 

Next Steps for Distressed Business Financing 

Any number of funding scenarios may allow a distressed business to regain its financial footing. An expert can help identify all opportunities, structure agreements that help maximize assets and protect a business’s future, and consider personal responsibilities, if or when the business becomes insolvent. 

When creditors are closing in, exit strategies such as bankruptcy sometimes become the best choice. We counsel clients through the bankruptcy process when necessary, advising them on pre-packaged reorganization filings, debtor-in-possession financing, Subchapter V reorganization, and other reorganization strategies. 

If bankruptcy does become your best option, we’ll help you make the right decisions for your business and your future. But if you’re not there yet, there’s time to examine all the strategies that could help you avoid bankruptcy and build a strong financial foundation for your business’s next chapter. We help clients review their options and make confident decisions for themselves and their businesses in a timely manner. 

At Sassoon Cymrot Law, LLC, our broad experience with real estate, bankruptcy, taxation and litigation allow us to advise distressed businesses on a full range of issues, from finding new sources of financing to restructuring and workouts. If you have any questions about distressed business financing, real estate, bankruptcy or anything else, our attorneys are happy to help. Contact us today!

Devon A. Kinnard is a Partner at the firm focusing on finance and commercial transactions, including bilateral and syndicated asset-based and commercial real estate loan facilities; state and federal tax credit financing; bond and public finance transactions; private securities offerings and debt and equity capitalizations; joint ventures; mergers and acquisitions and other corporate transactions arising out of the day-to-day operations of closely- and publicly-held companies.

We're Excited to Announce!

Sassoon Cymrot Law and Grossman & Associates have joined together into one firm under the Sassoon Cymrot Law name effective May 1, 2021.