When Gov. Jay Inslee shut down the state’s bars, gyms, and many other public-facing businesses Monday, the managers at Vertical World, Seattle’s oldest indoor climbing gym, quickly realized they needed an entirely new strategy.
After trying to run the gym’s three locations with skeleton staffs as business plummeted, Vertical World now had to figure out how to put an entire operation on hold until the coronavirus outbreak is over. That meant cutting staff to caretaker managers, working with vendors to reduce expenses, and staying in touch with the gym’s several thousand members, said director of operations Tami Johnston.
Vertical World can maintain this stasis for “a couple of months,” Johnston estimated, but it will be an evolving, day-by-day process. “Every month that goes by, it’ll get harder,” she said.
Across the Seattle area, thousands of business owners are making similar calculations as they brace for what could be several months of little or no revenue.
For some, especially those with smaller businesses that may have struggled even before the outbreak, the economic shock waves have been so sharp that they simply won’t recover, warned Thomas Gilbert, an associate professor of finance and business economics at the University of Washington Foster School of Business.
But for other hard-hit companies that were in good financial health before the outbreak, it’s a different game, Gilbert said. Because the outbreak could be relatively short-lived –and because government agencies are targeting small businesses with hundreds of billions of dollars in loans, tax breaks, and regulatory relief — hard-hit but otherwise viable companies may see a “recovery [that] could be quite swift,” Gilbert said.
For them, the challenge is finding a strategy that preserves whatever business capabilities are necessary for a successful restart, said Jay Kornfeld, a Seattle bankruptcy attorney and business adviser. Kornfeld, who has been closely monitoring how long it has taken businesses in China to restart after the outbreak, suggests that at a minimum businesses “have got to be planning on a 90-day problem here.”
For some firms, the sharp decline in customers and revenues has left little choice but to put their operations in a kind of suspended animation. That’s clearly the case for many companies that were ordered closed, such as Vertical World. It’s also the course being adopted by many restaurants, especially those in downtown Seattle, where business had dropped by as much as 80% even before the governor ordered the closures.
For other businesses, staying viable means maintaining at least a minimum level of business activity. Seattle restaurateur Ethan Stowell, for example, is keeping two of his 16 Seattle-area eateries open for take-out food. Although he’ll be losing money, Stowell hopes the strategy will let him keep employed as many of his staff as possible including senior managers he’ll need to quickly reopen after the outbreak.
“If all my managers are gone, then I have to hire [new] managers, I’ve got to train managers … and then they’ve got to build their own teams,” he said.
Whether affected businesses opt to scale back or pause entirely, most face a common set of challenges. “The first thing I ask is, ‘what do we need to pay?'” said Eric Orse, a Seattle business consultant who works with distressed companies. “What is the highest priority cash payment to keep the business running?”
Vertical World, for example, has prioritized health insurance premiums for its 150 out-of-work employees. But the company has canceled nearly every other expense, including laundry and cleaning services, water deliveries, and various retail orders.
Most important, Vertical World is working with building owners to defer payments for its three locations.
For many Seattle-areas businesses, those sorts of deals on rent, bank loan payments and other large fixed costs will be key to outlasting the shutdown.
Some breaks are already in the works. State and local governments, for example, have announced they will let some small businesses defer some tax payments, such as the business and occupation tax in Seattle, or avoid some regulatory costs, such as the extra expenses that normally come with having more employees collecting unemployment insurance.
But getting relief from other fixed costs, such as loan payments and rent, will require small businesses to go directly to their banks and landlords. Although small business owners are often reluctant to make these requests, experts say the crisis gives them considerable leverage.
“Everybody understands the situation that we’re in, which is helpful for business owners, and they should reach out,” said Orse, who urges business owners to contact creditors to discuss deferments or even new loan terms before any payments have been missed.
Kornfeld puts it more explicitly. Business owners need to tell their landlords, “Look, obviously we’re all in this together, right? If you’re my landlord and I’m not here when this is over, you’re going to have an empty space that will be incredibly difficult to fill,” he said.
Kornfeld expects many banks to be similarly open to concessions. “Banks understand that in this environment, you really don’t want a business to be in bankruptcy because it … means the business will completely close down and value will be lost” said Kornfeld.
Seattle-area bankers are already preparing for such conversations. At Seattle-based HomeStreet Bank, for example, lending officers are dusting off tools they used to help small businesses during the Great Recession, including payment deferment, loan restructuring, and additional credit to help businesses “get to the other side” of the outbreak, said CEO Mark Mason.
WaFd Bank, the Seattle-based lender formerly known as Washington Federal, is offering outbreak-impacted small businesses lines of credit of up to $200,000 interest-free for 90 days, as well as smaller loans of $30,000 for businesses that can show that revenues have been affected by the outbreak.
Some of that emergency lending is being prompted by the federal government’s massive emergency stimulus package, which has cut interest rates and injected hundreds of billions of dollars into the banking system.
Small businesses also have access to an emergency loan program under the Small Business Administration. Banking industry officials like Mason say these funds could be critical for small businesses that have successfully paused their operations during the outbreak, but may not “have enough working capital to restart.”
Vertical World, for example, is confident its highly dedicated customer base will return once the outbreak is over; indeed, many members even offered “to continue to pay dues” during the shutdown, Johnston said. But because of a recent construction project, the company has less than its usual cash reserves and plans to apply for federal loans. “The hope is that we don’t have to take it,” Johnston said.
Experts say that while these emergency programs may be essential to give businesses extra time, all come with caveats and costs.
In exchange for deferrals and other flexibility, for example, businesses will have to accept closer-than-usual scrutiny by lenders, landlords, investors, suppliers and other partners, said Kornfeld, who urges business owners to be be proactive in telling creditors “what my revenue will allow me to do right now.”
Businesses may also have to accept new conditions. Creditors, for example, may require business owners to put more of their own money into the business or personally guarantee future payments or restructured loans — conditions that may exceed the comfort level of many business owners, and which should always be reviewed by an attorney.
Above all, experts say, businesses can’t forget that the goal isn’t just surviving the shutdown, but being in a financial position to actually reopen on the other side.
Stowell, the restaurateur, cautioned small business owners against thinking of deferrals or refinanced terms as some sort of free pass.
“If it’s a deferment, it doesn’t go away,” he said. “You still have to pay it back.” And those payments will add pressure as businesses try to reopen and quickly ramp up revenues, said Orse. If you planned for a 90-day interim, he said, “on day 91, you may have to start making payments on 90 days of deferments.”
Stowell also advised small businesses to be extremely conservative if they’re considering an emergency loan. While financing can be essential for reopening, Stowell said businesses should think carefully about borrowing to cover operating costs during the shutdown.
“I get nervous about a bunch of small business owners taking a bunch of loans to cover payroll,” he said. If the business can’t pay them back, “then it’s more than just the business that’s it’s going to hit–it’s going to follow them personally.”
But economists like Gilbert said that for otherwise viable companies, those risks may be unavoidable in order to survive the outbreak. He pointed to fellow economist Ricardo Reis at the London School of Economics, who has likened the coronavirus shock to the shock faced by farmers when weather ruins a year’s crop.
The farmers’ land is still productive and there’s still demand for their crops — the challenge is surviving until the next harvest.
“The soil is there — you plant and the trees are going to grow just as they did before,” Gilbert said. The challenge, he adds, is lasting long enough to “get beyond the bad weather, plant the new crops and get going again.”