The following is a guest post from David Dragich, corporate restructuring lawyer and founder of The Dragich Law Firm. Opinions are the authors’ own.
We are in a turbulent economic environment, and many business leaders are grappling with how to navigate growth amidst mounting downside risks.
Recently, concerns have intensified due to global tariffs causing significant disruption to financial markets, creating uncertainty and potential distress for many companies. Businesses that successfully navigate through this volatility will be those that take decisive action now with proven strategies to strengthen their financial position, protect critical relationships and prepare for various restructuring scenarios.
Where we’ve been and where we may be headed
In recent weeks, global markets experienced severe shocks following the announcement of substantial U.S. tariffs imposed on goods from numerous countries. The immediate reaction was sharply negative, with the Morningstar LSTA US Leveraged Loan Index plunging 0.63% on April 3, its fourth-worst daily return since April 2020.
Investor sentiment soured further with another drop of 0.47% the following day, pulling the year-to-date returns into negative territory. Analysts are also increasingly concerned about the risk of stagflation — rising prices coupled with slowing growth — prompting many financial institutions to revise their economic forecasts downward. The stock market has been hit hard as well.
Historically, cyclical industries bear the brunt of these credit contractions, including retail, commercial real estate, manufacturing sectors with global supply chains and other vulnerable segments.
These market dynamics are reminiscent of previous restructuring waves, notably the 2008 financial crisis, and suggest that many businesses may soon face significant financial distress. Businesses previously buoyed by easy credit and low interest rates now face tightening liquidity, higher borrowing costs, and strained supply chains due to global trade disruptions.
Proactive steps to protect your business
As financial conditions deteriorate, the actions companies take in the early stages of distress often determine their ultimate fate. Companies that recognize warning signs and implement strategic measures quickly typically preserve more options and stakeholder value. Based on patterns observed across multiple economic cycles, the following five steps represent critical actions that distinguish resilient businesses from those that struggle when markets turn.
- Increase liquidity. Cash is crucial for surviving downturns. Companies should proactively tap available credit lines before conditions worsen and consider divesting non-core assets now, while there remains a viable market.
- Safeguard your supply chain. Tariff-related disruptions may cause suppliers to fail or face significant delays. Assess critical suppliers — especially single-source providers — and develop contingency plans to mitigate supply chain interruptions.
- Closely monitor customers’ financial health. During downturns, customers may delay payments to conserve cash. Regularly audit their financial health, enforce payment terms, and consider cash-on-delivery or guarantees. Watch for delayed payments, extended term requests, reduced orders, or shifting buying patterns. Monitor metrics like worsening cash conversion cycles, rising debt-to-EBITDA ratios, and shrinking margins. Set an early warning system for customers over 15 days past due and consider credit insurance for key accounts.
- Anticipate insolvency risks in contracts. Approach new agreements cautiously, embedding insolvency protections and safeguards within contractual terms that limit exposure in case counterparties encounter financial difficulty.
- Halt collection efforts upon bankruptcy filings. Once a customer files for bankruptcy, cease collection immediately. Instead, explore legal avenues to recover amounts owed through administrative claims or reclamation rights.
Bonus tip: Understand all your restructuring options. If your company is experiencing distress, bankruptcy isn’t always the best or only solution. Alternative mechanisms such as out-of-court wind downs, state of federal court receiverships, or assignments for the benefit of creditors can offer many benefits without the scrutiny or drawbacks of bankruptcy.
Proactive preparation minimizes risk and positions your company to weather economic turbulence effectively. Given the uncertain environment created by the global tariff disruptions, taking these steps now can significantly influence a company’s resilience in the months ahead.
