When Congress passed the SBRA in the summer of 2019, the economy was humming along. Projections. Government. Legislatures. Business owners. They all thrive on projections. Baked into the SBRA were projections as to how many businesses would seek the benefits of the SBRA. When that number was estimated, Congress made the decision that the impact on the banks in terms of lost dollars was outweighed by the benefits of saving the small number of small businesses that would, in a good or even bad economy, need to avail itself of the SBRA’s debt elimination, reduction and restructuring features.
Nobody projected COVID. Or the near catastrophic economic consequences brought about by the economic shutdowns. The SBRA fits within the second prong of the government’s approach to the pandemic. The first policy guiding the government is doing whatever is necessary to minimize deaths. The second prong is providing tools to ameliorate the economic consequences of economic shutdowns. Some of these tools we are well aware of: The paycheck protection program. Small Business Administration emergency loans. Moratoriums on foreclosures and evictions. Increased unemployment benefits. Expansion of unemployment benefits.
The SBRA, unwittingly, has become one of the tools provided by government to business owners to minimize the economic consequences of the economic shutdowns and the resulting changes, some say permanent, to purchasing patterns. Frankly, the SBRA’s benefits dwarf the other measures– which are really nothing more than a “bandaid” type approach. A few dollars here or there to meet payroll or some fixed expenses.
But the SBRA’s ability to eliminate, restructure and reduce debt is so powerful that Congress may have to roll back what business owners might hope to achieve in these types of proceedings. Take the restaurant industry, for example. And assume that 100,000 restaurants have, on average, contracts to purchase $100,000 worth of equipment. Given the risk, interest rates are undoubtedly in the 8% to 15% range on those contracts. Restaurants are seeing 30% to 70% reduction in income. If each one of them were to file for SBRA benefits, banks would definitely feel it. Here’s why: restaurant equipment devalues to next to no value once it’s put in service. $100,000 purchase. Three years later $80,000 owed. Equipment is worth $20,000. The SBRA would rewrite the purchase contract to $20,000 at 6% interest. That’s a loss of $60,000 to the bank. Multiply that by 100,000 restaurants: $6 billion.
Extend that trend over additional contracts categories (building purchases, unsecured debt, taxes, wages) and into additional industries and the consequences become apparent. And I am not sure Congress would, or could, allow those consequences to materialize. The take away? Get your case filed ASAP, before any changes to the law, in order to maximize the benefits your company can expect. Frankly, when you file may well determine whether your business survives. And that may well determine whether the lifestyle you’ve enjoyed because of that business continues- or is lost forever. Those, I believe, are the stakes here.