How do I future-proof my small business in case of disaster or emergency?

2022-05-10   minute read

John Haralovich

Lifestyle Debt

Debt Solutions

Whether you run your business via a corporation, partnership, or sole proprietorship, you cannot know when events in the future will have a significant impact to your business and cash flow.

small business owner looking at business options on tablet

We’ve all experienced some impact from the various lockdown measures put in place over the last two years with COVID-19. With those challenges as a backdrop, here are a few tips of things you can do today that can help you personally if another future event impacts your business, its cash flow and ongoing viability:

  1. Stay current on your employee source deduction payments. This claim is a debt that attaches to corporate assets in the case of a corporation or to personal assets if a sole proprietorship.
  2. Stay current on your HST filings and payments for the same reasons noted above.
  3. Directors of a corporation are personally liable for employee source deductions and HST amounts due. This means that if a decision is reached to cease corporate operations, the directors will have to satisfy the amounts due from personal assets.
  4. Avoid personal guarantees for leased premises. In the event of a cease of operations, the landlord can attempt to satisfy the future lease obligations by requiring the guarantor to make good on the lease commitments.
  5. Shareholder loans to a corporation should have a registered loan agreement that provides for security for the advances made. This will help protect personal loans made to a business in priority to the unsecured creditors, however this would rank behind secured Banks and Canada Revenue Agency.
  6. The use of budgets and cash flow projections will help a business navigate changes to its operations that are impacted by local or global events. With these projections, changes in income can be tested to help determine the appropriate amount of cost reductions necessary to ensure the operations continue without incurring additional debt.
  7. Cost reductions typically take the form of staff reductions and reductions in purchase of raw materials. When it is determined future operations are being impacted (regardless of reasons), the use of financial modelling will pinpoint where management can make changes. There are some costs that are fixed and cannot be avoided; however, variable costs can be adjusted to match the projected revenues.
  8. Deferred loan payments are another option through which working with your lender during a difficult financial period could provide the additional cash flow to ensure your operations remain viable. Typically, these deferral arrangements last for a period of approximately six months. It is always best to be open with your lender as to current events that impact operations. They are invested in your business and as a result, have an interest for you to succeed.
  9. Do not borrow money to support ongoing losses. This is a natural solution to allow operations to continue, however, if the underlying reasons for the cash deficiency cannot be addressed and corrected, the future viability of a business remains in question.

There are situations where, even after enacting all of the above measures, you cannot avoid the need to have a formal restructuring arrangement between your business and its creditors. In these situations, the company negotiates with secured and unsecured creditors.

Arrangements with secured creditors could include the deferral of principal payments for a period of time, selling of assets to repay the lender over an agreed period of time, and obtaining their support for the formal restructuring to show the unsecured creditors that the key stakeholders support the ongoing operations.

In the case of unsecured creditors, (your trade accounts payable) a typical restructuring arrangement requires unsecured creditors to agree to reduce their debt by a certain percentage to be paid over a specified period. The future cash savings could be enough to weather the storm and allow for your business to resume normal operations.

MNP can help

The above should provide most business owners with steps to help weather the next significant event. If you’ve looked at all your options and you are considering a formal restructuring plan, reach out to connect with MNP LTD. One of our Licensed Insolvency professionals can assist you and your business in knowing your options and making the right choice to reduce your financial burdens

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