As business owners navigate the changing environment in response to the coronavirus pandemic, they may need to look at alternate sources of capital to reinvest in their company. This bulletin provides guidance on reinvestment options and addresses questions that business owners may face.
My business needs additional capital right now; what is the safest way for me to “reinvest” in my own business?
Answer: While not every lender will permit this approach, the safest way for a business owner to reinvest in its own business is through a participation interest in the senior secured debt. Of course, the riskiest way to reinvest in the business is simply putting in more equity capital; however, depending on the existing loan agreements and governance documents, this may be the only option available to you.
What about borrowing from my 401(k) plan?
Answer: We always advise against invading your 401(k) plan to obtain capital for the business. No creditor can force you to do that, as the assets in your qualified 401(k) plan are exempt from the claims of any creditor. The recent federal legislation has eased some of the negative consequences of borrowing from a 401(k) plan, but this should always be the absolute last-ditch option. If you do this, make sure it is for the right reasons and after talking with your tax advisor—don’t let someone coerce you into doing so.
I think I am doing better than many of my competitors; how do I use this to my advantage?
Answer: The time might be right for consolidation within your market segment. If you have the opportunity to purchase competitors, your operating assumption should be that any transaction would be acquiring the assets, not the stock, of the target. Additionally, be aware of non-solicitation and non-compete agreements and be careful when approaching top customers or sales representatives from your competitors. Bad facts make for bad outcomes.
We will continue to provide any guidance on companies under distress. If you have additional questions, our Distressed Company Task Force can answer, please email email@example.com.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.