As a business owner, you’re likely facing a monumental challenge to navigate the public health crisis and economic stress triggered by COVID-19.
Maybe you’ve struggled through a complete business shutdown. Maybe you have a higher risk tolerance or more liquidity to help cope. But like many business owners, you may desperately be seeking creative ways to maintain business cash flow to help you get through a tough year.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and similar federal stimulus packages have channeled hundreds of billions of dollars to businesses. But, “it’s equally important to consider other ways to improve cash flow,” says Amy Friedrich, president of U.S. and Insurance Solutions at Principal®. “Business owners need to be especially thoughtful about every expenditure.”
Principal business analysts have compiled some of the most helpful ideas beyond federal relief programs—like renegotiating leases, delaying payroll tax payments, and accessing lines of credit or other cash positions like cash-value life insurance. The ideas generally are in order from simpler to more disruptive, but of course business circumstances vary.
1. Negotiate local bills
The landlord or service provider who personally knows you and your business may offer a sympathetic ear and agree to late or partial payment of rent and other regular costs.
2. Adjust your inventory
Manufacturers and other businesses with more resources tied up in supply chains could ease toward just-in-time inventory that may provide immediate budget savings
3. Disrupt yourself even more
This is the “make lemonade out of lemons” reaction to the pandemic: Are you able to conduct business online or through remote work more than you realized, which removes the expense of paper processing, travel, or that costly office expansion you had planned.
4. Scrutinize the rest of the year’s budget
Even if you’re unable to transform your business operations, creative budget savings still may be possible. Has your surprise technology splurge when the pandemic hit freed up budget categories late in the year? Every $20,000 here or $5,000 there can help.
5. Check out state, local, and private resources
Many state and local governments and private corporations have already stepped up to offer special emergency loans, grants, and pools of funds to assist small businesses. For example, Facebook launched a $100 million relief program. State government efforts vary, but low- or no-interest loans to small businesses are common, along with deadline extensions for tax filing. The Small Business Administration (SBA) also has a variety of other relief options in case you missed any.
6. Find a new silent partner
Maybe you know a fellow entrepreneur whom you trust and with enough liquidity to invest in your company when you need it most.
“The silent partner can make money and, in the process, the added liquidity may help your business weather this crisis,” says Mark West, national vice president of business solutions for Principal.
7. Look to cash reserves or investments
Even if eventually earmarked for other purposes, they could help with immediate cash-flow needs, but prioritize. For example, consider paying payroll and fixed costs first, and allow variable costs, like new inventory or supplies, to wait.
8. Reach out to your banker
While you may not be able to match the 1 percent rate of emergency federal stimulus, good credit and a good relationship with your local lender means that loans today generally remain affordable. Explore any existing lines of credit your business has or could establish, particularly if there’s land or equipment that could secure a loan.
9. Amend old tax returns
You may have recognized a net operating loss (NOL). Emergency federal legislation made a couple of key temporary modifications to the Tax Cuts and Jobs Act (TCJA) of 2017: The CARES Act allows businesses to apply NOL in prior years to receive a tax refund. For tax years 2018–2020, NOLs may be retroactively carried back over the prior five years to reduce taxable income.
Other new provisions also allow corporations to claim 100 percent of outstanding alternative minimum tax (AMT) credits in 2019 and even to accelerate claims to 2018, rather than limiting the credit (as required by the TCJA).
These are complicated decisions; be sure to consult your accountant or another tax preparer.
10. File your 2019 taxes now but pay later
Speaking of taxes, the Internal Revenue Service (IRS) has given you more time to file (until July 15, 2020), but if you apply for any loans, you’ll likely need tax documentation showing your business can manage the payments. Individuals can delay payment of up to $1 million of income taxes; C corporations can delay up to $10 million.
11. Withdraw or borrow from your cash value life insurance policy
If you or your business owns one, explore this option. Unlike term insurance, which provides death benefit protection only, a cash value policy includes a savings feature that builds cash value during your lifetime. If you borrow from the policy, loan interest will likely accrue, but many policies offer loan crediting rates that may either reduce the net cost of the loan interest or possibly result in a 0 percent wash loan (that’s when the interest credited to the policy each year and the interest charged for the loan are equal so the effective interest rate is 0 percent). Typically, wash loans are available after you’ve held the policy for a specified number of years.
Assuming the policy isn’t classified as a modified endowment contract (MEC), cash withdrawals generally come first from your basis (the sum of your premium payments, minus any tax-free amounts you’ve withdrawn). Because of this, income tax isn’t triggered. Once the basis is recovered and a withdrawal is taken from gains, income tax will be applied. Policy loans (assuming the policy is not a MEC) are not considered taxable income, as long as the policy remains in force.
12. As a last resort tap into a personal retirement plan or assets
If the CARES Act’s temporary access of up to $100,000 of your retirement savings is allowed under your retirement plan, you can do so without the usual 10 percent penalty.1 If you repay the funds within three years, you may even avoid paying income tax. Although IRA and 401(k) balances may be down due to market volatility, your account could be a source of immediate cash.
If you have a nonqualified deferred compensation plan, you may be able to take out money for an unforeseeable emergency. Check if your plan allows it. It may also be possible to cancel deferral elections. (Quick tip: These plans are typically an executive benefit offered to senior management or highly compensated employees.)
Establish personal access to a home equity line of credit to help ease a temporary financial shortfall.
- More questions? Work with your financial professional.
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