Nearly overnight, our lives have changed. Many small business owners are being forced to deal with the reality that they will have to close for an extended period of time because of the novel coronavirus. Even for those that can remain open, it’s unlikely to be business as usual.
The good news is that social distancing is aimed at limiting the outbreak’s spread, duration and strain on the medical system, but it will be a while before we know how long these measures will be necessary. If your livelihood is disrupted today, then you need help now.
“Small business owners have a number of options, maybe more than they think, to quickly access funds at a time like this,” says Bill Taylor, vice president of Financial Planning and Sales Support at Northwestern Mutual. “This is the time to be leaning on as many of those options as possible so they can continue to meet their obligations at a time when income is uncertain.”
If your small business needs help, Taylor says there are a few steps you can take to access cash now.
If the flow of money coming in slows, you’ll obviously want to reduce the amount that’s flowing out as well. Here are a few ways you may be able to keep money from going out — at least temporarily.
Put off paying your taxes. The federal government has extended the deadline to file and pay your taxes until July 15. If you owe taxes, you will eventually have to pay them. But this is one place where you can hang on to some cash right now.
Delay payments. If you have 30 or 60 days until a payment is due, consider using all that time. Like with your tax deferral, you will still owe the money, but this is a good way to keep cash flow now.
LINES OF CREDIT
“If you have an open line of credit or margin account, this should be one of the first places that you look to keep cash coming in,” Taylor says. These accounts will typically allow you to access cash quickly and, at today’s low interest rates, the cost of borrowing will likely be low. You could also look at opening a new line of credit, but if you need cash right away, opening a new account may take too long. One note with a margin account, just be careful not to borrow right up to your limit as the stocks that secure the loan may continue to lose value in coming days.
BORROW AGAINST CASH VALUE LIFE INSURANCE
If you or your business owns whole life insurance that has accumulated cash value, in many cases, you can easily access that cash by taking a loan against the cash value. One option is taking a loan from a bank and using your life insurance policy as collateral. Depending on the bank’s loan process, this can take time with an application and approval process. You may be able to get favorable rates if the insurance company is highly rated.
Another alternative is borrowing from the life insurance company. “With policy loans, you can typically get a check from the insurance company within a matter of days,” Taylor says. “The nice thing about a policy loan is that repayment is flexible, there’s not a set schedule. In addition, unlike your stocks, the value of whole life insurance isn’t affected by market declines. But the loan will accrue interest, so it’s important to make sure you’re managing it properly.”
Another option if you just need cash flow is to use dividends or cash value to pay your life insurance premiums. One thing to note, using cash value to pay premiums means that you are taking a loan against your policy that will eventually need to be repaid.
It is also possible to surrender some or all of your life insurance policy and take the cash value. However, this is typically a last resort because you will not be able to reinstate your insurance in the future — you would need to buy a new policy.
“Typically, we’d never recommend going into credit card debt,” Taylor says. But these are very unusual times and in some cases, you may be able to use credit cards to your advantage in the short term.
Use points. If you have accumulated credit card points, you may be able to use them to pay your balance without spending cash now. Or you might be able to spend your points for things you need, freeing up cash for other needs today.
Take advantage of a 0 percent offer. Many cards offer a promotional interest rate on new purchases or on a balance transfer when you open a new card. This could be a way to temporarily access cash without owing interest (at least right away). If you go this route, there are a couple of things to watch for. First, watch out for balance transfer fees; many cards offer low or no fees. Second, typically you must make minimum payments or the interest will jump up right away. Make sure you make whatever minimum payment is required. Also note that applying for new credit can negatively impact your credit score. You typically want to avoid opening too many new accounts in a short period of time.
Carry a balance. To be clear, this should also be a last resort. But If you absolutely need access to cash and have run out of other options, this exists as an option. Like we said, these are unusual times. If you are going this route, it’s important to start thinking about a plan to pay down your debt. You should also monitor closely how much you’re paying in interest as that can make your balance add up quickly.
Interest rates are at historic lows right now. If you have any existing debt at a fixed rate, you may be able to refinance and get a lower rate. “While that’s not likely to help you in the coming days and weeks, it may free up future cash flow that you’ll be able to use to pay back short-term debt that you may have to take on now to make ends meet,” Taylor says.
The federal government is working on a package that will include assistance for average Americans and small businesses. While the exact details aren’t clear yet, it’s safe to assume that some form of government help is likely on the way.