Essay on Financial Support for Companies in Crisis by Shareholders

Published: 2021/12/02
Number of words: 3976


Crisis in businesses occurs when unforeseen problems arise hence threatening the company’s stability. Such problems can either result from internal business factors or external influences. In some cases, such problems can escalate beyond organizational control leading to permanent damages like a business failure. Crises cannot be avoided, and companies are required to have established measures in preparation for crisis. Crises can take various forms, including natural crises, technological crisis, organizational crisis, personnel crises, and financial crises. The financial crisis is the most common in most companies hence requiring financial support from shareholders[1]. It occurs when the assets of the company lose value making it challenging to pay off debts. The company, therefore, moves funds around in order to finance short-term obligations. Also, it evaluates the revenue sources to provide adequate finances to fund business operations. As a result, the shareholders can offer financial support to the company to ensure business continuity and profitability. Since crises are risky to business operations, companies should have the adequate cash flow to push them through tough economic times.

1.1. Problem Statement

Shareholders play a crucial role in supporting a company financially during a crisis. Crises cannot be predicted and require companies to be fully prepared. For instance, the current coronavirus pandemic has caused economic shrinkage in most countries, creating a financial crisis. The reason being countries are in lockdown and fundamental human rights like freedom of movement has been restricted. Thus, most businesses have suffered cash flow problems and may require shareholders’ assistance to resume business operations during recovery. Since crises put organizations at risk and may bring adverse effects and companies may be forced to seek help. However, the lack of financial support from shareholders may cause the business to fail. When crises are not monitored well, they can have adverse effects on the company’s financial health. Thus, companies must ensure they plan for unforeseen circumstances and prepare adequately to avoid suffering massive financial losses. Shareholders should also be prepared to provide financial support when such unforeseen circumstances arise.

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1.2. Research Questions and Objective

Companies require financial support when in crisis, and shareholders are primary providers of additional capital. To avoid business failure during a crisis like the financial crisis of 2008 or the economic recession, companies require financial support to continue making profits. For that reason, shareholders can offer finances to their companies to assist in dealing with harsh economic conditions. This paper’s objective is to evaluate how shareholders provide financial support to their companies during crisis time. Different research questions will help in achieving the paper’s aim, and they include; what crisis requires shareholders to provide financial support to their companies? How can shareholders offer financial support to help companies in times of crisis?

2. Crisis in companies

2.1. Kinds of crisis

Suppose an organization has €2 million but owes €3 million, but they cannot get finances from other sources to pay off the debt. This situation presents a crisis. A crisis may be psychological or economic hidden but distressing. A crisis threatens a company’s stability but can be mitigated through crisis management. The process of crisis management requires businesses to undertake effective decisions that prevent unfavourable organizational effects from preserving the welfare of stakeholders. When a crisis occurs, the management is responsible for communicating potential effects on shareholders to develop a viable solution[2]. In most cases, crisis results in financial losses; thus, a practical solution is to acquire additional financing. Various types of crises occur in organisations, and most require shareholders’ financial support.

Natural crisis: this crisis occurs due to natural events and may include earthquakes, floods, hurricanes, tornados, and volcanos. Natural crises are unpredictable and can occur at any time leading to controllable or severe business losses. The management has no control over such crises and has no ability to prevent it. The effects of the natural crisis are adverse in most cases and may damage company property significantly. As a result, the company suffers enormous financial losses that require shareholders’ help to pull through the crisis.

Technological crisis: in the contemporary business world, most organisations rely on technology for success. Technology failure leads to a technological crisis, for instance, corrupted software and machine breakdown. For example, coffee businesses like Starbucks rely on coffee machines to service customers. The breakdown of such machines slows down business operations, and customers may go irritable. Also, if companies like Instagram get compromised, for example, malware introduced by hackers, the company may lose substantial income gained through advertising. A massive amount of money may be required to service the servers; hence shareholders opt to introduce additional capital to the business to assist during the crisis.

Personnel crisis: this crisis arises when the organisation suffers considerable personnel shortage or when employees fight amongst each other, resulting in a conflict. Lack of agreement between the management leads to non-productive actions, including strikes and boycotts for an unknown period. Lack of coordination, ineffective communication, and internal disputes give rise to personnel crisis. For instance, employees may boycott due to unpaid wages and salaries, and the situation may require the financial support of shareholders. The reason for financial support is that organisations cannot operate without employees, and massive losses may be incurred during such situations.

Financial crisis: occurs when companies are hit by substantial financial losses due to factors like changes in market trends, inflation, revenue losses, currency crises, and bankruptcy. The financial crisis is the most acknowledged crisis affecting most companies globally and has led to the closure of businesses. A financial crisis is hard to deal with and has adverse effects on the company. Customers may lose trust in the company when the financial crisis is not handled swiftly and carefully. The entrance of new competitors in the market leads to market share loss, and companies lose revenues. In addition, competitors may lower prices forcing customers to purchase their cheaply priced products[3]. The company thus loses customers and profits to the competition. Bankruptcy arises when the business is unable to pay off creditors, forcing some assets to be sold. Inadequate assets to cover loan obligations worsens the situation enabling shutting down of business.

In the banking sector, a financial crisis occurs when depositors make sudden withdrawals resulting in a bank run. Most organisations in the banking industry lend out significant amounts of cash received. Sudden withdrawals become a challenge for banks to accumulate enough funds for depositors, resulting in a crisis. Crisis renders banks insolvent, and depositors may lose their money, which cannot be covered by insurance. As a result, banking panic arose like the Northern Rock run in 2007, and the Bank of the United States run in 1931[4]. Shareholders can mitigate this systematic banking risk by assisting the institution financially to avoid losing depositors.

During a financial crisis, the business cannot make loan repayments, interests, and shareholder’s dividends. Also, when there are substantial business losses over time, the financial crisis occurs. The shareholders have an obligation to rescue the business to avoid total liquidation or take over. Most financial crises are linked to economic recessions and banking panics. Other conditions included stock market crashes. An unexpected decline in stock prices leads to considerable paper wealth losses. Right now, stock markets have declined globally as a result of the 2020 coronavirus stock market crash. Key European stock market indices have dropped by approximately 8 percent, the largest decline since the 2008 financial crisis. Stock prices fell by over 10% after the American government banned travelling from Europe[5]. The current coronavirus pandemic has seen businesses losing significant cash flows and others shutting down. The stock market is adversely affected, and companies cannot raise capital to fund business operations. In times of financial crisis, companies can seek financial support from shareholders to avoid the inevitable.

The pandemic has resulted in an economic recession since the travel ban and lockdown has had negative impacts on business. For instance, the airline industry is severely affected, and continued travel ban may lead companies into selling off assets to pay off short-term obligations. According to BBC News, the coronavirus has pushed the economy of Germany into recession. More than 15,000 businesses in the hospitality sector claim they have experienced severe impacts from the pandemic, ranging from loss of customers and revenues. After the emergence of the pandemic, the German economy declined by 2.2%, a significant drop since the country was affected by the global financial crisis in 2009[6]. Businesses have been hit by commercial activity restrictions, travel ban, and consumers’ choices to avoid infections. As a result, investment and consumer spending have dropped.

During the coronavirus pandemic, businesses have lost revenues, and others closed down. In Germany, the hospitality and airline industry is the worst-performing during the pandemic. Even though the government has offered loans to companies to manage funding operations and paying employees, such an amount may not be sufficient. Therefore, companies may turn to shareholders to issue additional financing. Since the stock market is non-performing in this economic recession, companies cannot raise adequate finances. Through financial support, shareholders can save businesses from collapsing or being taken over by other powerful companies. Equity financing is mostly preferred since it does not require repayment compared to debt financing. The loans acquired by most businesses in Germany to cover business expenses require repayment in the coming times. However, the world is uncertain regarding the exit of the virus. Therefore, businesses will pay off such loans for an extended period limiting cash flows for other business projects like expansion. To avoid such situations, shareholders can support their companies to ensure adequate cash flow for financing business activities. There are more signs the Germany economy may undergo further financial crisis as the economy continues to drop. This implies businesses will be affected to a significant extent. Geopolitical uncertainty and international trade wars like China and the US have adversely affected the economy, which depends extensively on exports. Slow growth is weakening the country’s market for products and the Trump government imposing sanctions on European cars and steel and aluminium. Angela Merkel has warned Germans of a potential financial crisis resulting from the trade war and dealing with the Brexit divorce the country is dealing with. Thus, businesses may further be hurt, and shareholders should stand by their business by showing continual financial support.

The economy of Germany enters a recession in 2020 during coronavirus crisis, source: BBC News.

2.2. Financial impacts of crises

If not mitigated, crises, especially the financial crisis, has detrimental effects on companies. Some such impacts include:

Business closure: during the financial crisis, businesses may be forced to shut down due to continued loss-making. During the global financial crisis, many start-ups shut down due to a lack of funds. In the current coronavirus pandemic, various businesses have closed shop to avoid further losses. Others with loan obligations are forced to delay interest payments due to cash flow problems. As a result, they risk being acquired by lenders. Business closure may be caused by bankruptcy. The financial crisis leads to bankruptcy since companies cannot pay off lenders and creditors[7]. To avoid possible bankruptcy and business closure, shareholders introduce additional capital to businesses to help in financing operations and hence resume making profits.

Slumping dividends and falling stocks: when revenues drop, stock prices also decline. Dividends slump upsetting shareholders. When stocks and dividends fall, investors may withdraw their investment, considering better-performing stocks. Thus, financial support is required from shareholders to stop depressing the company’s stocks further.

Poor product quality: products produced during the financial crisis may have inferior quality since the company is attempting to cut costs. Compromised quality discourages customers from purchasing the company’s products, thus losing more revenues. To avoid such situations, shareholders may provide financial assistance during a crisis to maintain product quality, and retain or attract more customers.

Benefits reduction and employee lay-offs: during a crisis, companies may lay-off employees and reduce benefits to diminish costs. Employees lose morale due to long working hours and pressure to meet customer demands. Companies require adequate workers to maximize productivity. Fewer employees may not adequately attend to customers’ needs or pay attention to product quality. When customers realise a company is in crisis, they lose faith in the company’s ability. Loss of customers reduces revenues and profits[8]. Companies can moderate this situation by utilising shareholders’ financial support, and ensure they hire sufficient personnel for all departments.

Supply chain disruptions: for any business, a reliable and efficient supply chain is crucial for success. Crises interfere with the supply chain. Lack of finances affects how businesses source raw materials and deliver products to customers. This situation slows down production and customer satisfaction. With low production, businesses cannot meet market demands, thus losing market share to competitors. Shareholders can avail of financial support to companies to ensure continuous production and customer satisfaction.

3. Shareholders’ role in crisis management

3.1. Financial support

Shareholders have a crucial role in assisting companies in crisis management. The setbacks for corporate boards and CEOs surpasses organisations’ disaster recovery and crisis management plans. Occurrence of crisis requires companies to evaluate corporate priorities including dividend pay-outs. Shareholders must fully participate in ensuring companies deal with immediate crisis and forecasting changes required by the crisis. To financially help corporations during crisis, shareholders can undertake various measures such as;

Suspending dividend payments: during crisis trade unions should call large organisations to play their part to mitigate economic effects of crisis through the suspension of share buybacks and dividend payments. In times of crisis, economists believe companies must put the interest of other stakeholders first and use retained funds to support business operations. Suspension of dividend payments shows shareholders are willing to financially support entities id dealing with present crisis. Engaging companies in crisis enables workers’ protection and ensures financial security. Discussions should prioritise the current crisis like the coronavirus and how to respond accordingly[9]. By openly supporting companies through dividend suspension, shareholders relieve the management of financial pressure.

Direct financial support: when companies are faced with a crisis, shareholders should show a willingness to support the company financially. Financial assistance can be in agreed loan terms or injecting more capital into the business. The company can make additional share issue to its shareholders to source more capital. Also, it can approach shareholders for loans to pull through the crisis. It is imperative for shareholders to show maximum financial support since business failure will imply loss of investment. Besides, during a crisis, companies require finances to diversify their portfolio to avoid losing money on a single investment. In the present time of coronavirus, most business have insufficient capital to push them through this uncertain period. As a result, shareholders must understand how their business is suffering financially and offer assistance. Loans or capital injections are primary and effective ways in which shareholders can help their businesses deal with a crisis. Furthermore, shareholders can engage in essential investment decisions which they desire to invest to boost the company’s cash flows. Additional investments enable risk diversification, which is a viable strategy in a crisis period. Shareholder’s experience in investment can thus be useful in allowing the company to obtain further finances.

3.2. Benefits of shareholders’ financial support

Various benefits arise for companies receiving financial support from their shareholders during a crisis period. Shareholders are essential elements in any organisation as they provide equity financing for funding business activities. Such benefits accrued by businesses include;

Adequate funding: during crisis times, companies struggle to meet business needs due to lack of sufficient financial resources. Loans are usually expensive to acquire since most companies lack adequate collateral. Shareholders financial support through loans or equity financing acts as a significant source of capital for the business. The company can pay off business expenses and set aside extra funds for projects. Day to day business operations require adequate funds to avoid failing in the process. During a crisis, one primary cause of business failure is the lack of financial resources to endure the harsh economic periods. As we see today, different sectors are struggling financially during the coronavirus pandemic. Although government loans are available, companies require a substantial amount of money to meet business obligations like wages and salaries. Shareholders’ financing is desirable during economic downturns and crisis as it provides sufficient financial resources for businesses to alleviate crises adverse effects.

Highly available and accessible: shareholders’ finances are highly accessible and available in time of need. For instance, during a natural crisis which is unpredictable, businesses may be hit hard, leading to substantial financial losses. Therefore, the company requires immediate finances to rebuild. In case the business lacks adequate funds to rebuild, it might need assistance. The loan application may be a lengthy process as the business strives to re-establish within a short period to resume business operations. It may be required to seek assistance from its shareholders who have available and easily accessible funds[10]. Other sudden crisis like what the world is facing now may need financial aid from shareholders. Financial institutions have taken advantage of the pandemic and raised interest rates. Also, there are fewer depositors; hence it has become hard to secure the required loan amount. Since it is their business, shareholders can lend or provide any required capital by the company to enable it to sustain the crisis resourcefully.

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4. Summary

In this paper, the financial support of shareholders has been perceived as a vital element towards business continuity. Shareholders need to actively provide financial support to their businesses during a crisis to ensure business operations do not stagnate. The financial crisis affects most businesses adversely and leads to total business failure if not mitigated on time. A crisis occurs in different forms, with others having moderate effects. When the financial element of any organisation is affected, the consequences may force the business to seek financial aid from shareholders. For example, during the coronavirus crisis, companies may turn to shareholders to acquire additional funds to finance daily operations. If not, production would definitely stop leading to the closure of various business segments. Shareholders can offer financial support through additional shares purchase or offering loans. Such loans are inexpensive compared to financial institutions loans, since repayment may be made on agreed terms, like when the businesses resume making profits. For most companies, crises are factors that occur unexpectedly, like the economic recession or the global financial crisis. As a result, businesses require to ensure preparedness in terms of financial resources to mitigate such crises upon occurrence. Also, shareholders need to be always prepared to ensure they can provide enough financial aid to businesses when the need arises.

5. Conclusion and Outlook

Most companies require financial aid during the crisis, primarily from shareholders. The future is uncertain, and companies cannot predict when a crisis will occur. The world has been caught unaware by the COVID-19 crisis, and many businesses are struggling to thrive. Inadequate cash flows have pushed various companies to the wall and have been forced to liquidate, others being declared bankrupt. Germany being the biggest economy in Europe has been struck by coronavirus pandemic, and businesses have turned to government loans. Medical experts are uncertain when the virus will end to enable companies to recover. In the meantime, shareholders have an important responsibility to finance their companies during the crisis. Previously, companies in Germany have been affected by the crisis, including the global financial crisis. In addition, the constant trade war between the US and China has adversely affected business operations. The business world is, therefore, unpredictable and different crises may likely occur in the coming times, and shareholders would be required to participate through financial support.

6. Bibliography

BBC News. 2020. “Coronavirus Pushes German Economy into Recession”. BBC News

Brunke, Bernd, and Johannes Klein. “Turnaround/Restrukturierung von Unternehmen in Krisensituationen.” In Strategische Unternehmensberatung, pp. 45-76. Gabler Verlag, 2012.

Dahles, Heidi, and Titi Prabawa Susilowati. “Business resilience in times of growth and crisis.” Annals of Tourism Research 51 (2015): 34-50.

Gropp, Reint, and Carlo Wix. “Langfristige Konsequenzen der Finanzkrise 2008/2009: Nachsichtige Regulierung schadet, flexible Löhne helfen.” Wirtschaft im Wandel 25, no. 2 (2019): 27-31.

Manzaneque, Montserrat, Elena Merino, and Alba María Priego. “The role of institutional shareholders as owners and directors and the financial distress likelihood. Evidence from a concentrated ownership context.” European Management Journal 34, no. 4 (2016): 439-451.

Michelsen, Claus, Marius Clemens, Guido Baldi, Geraldine Dany-Knedlik, Hella Engerer, Marcel Fratzscher, Stefan Gebauer et al. “Deutsche Wirtschaft in der Rezession: Engpässe überbrücken, Vertrauen stärken, Nachfrage anschieben.” DIW Wochenbericht 87, no. 12 (2020): 188-191.

Michelsen, Claus, Marius Clemens, Max Hanisch, Simon Junker, Konstantin Kholodilin, and Thore Schlaak. “Deutsche Wirtschaft: Corona-Virus stürzt deutsche Wirtschaft in eine Rezession.” DIW Wochenbericht 87, no. 12 (2020): 206-229.

Nienhüser, Werner, David Peetz, and Georgina Murray. “Wem gehören die großen Unternehmen? Restrukturierung des Eigentums während der Finanzkrise in Deutschland und den USA.” WSI-Mitteilungen 69, no. 8 (2016): 584-594.

Park, Hanna. “Exploring effective crisis response strategies.” Public Relations Review 43, no. 1 (2017): 190-192.

Storm, Servaas, and C. W. M. Naastepad. “Crisis and recovery in the German economy: The real lessons.” Structural Change and Economic Dynamics 32 (2015): 11-24.

[1] Brunke, Bernd, and Johannes Klein. “Turnaround/Restrukturierung von Unternehmen in Krisensituationen.” In Strategische Unternehmensberatung, pp. 45-76. Gabler Verlag, 2012.

[2] Park, Hanna. “Exploring effective crisis response strategies.” Public Relations Review 43, no. 1 (2017): 190-192.

[3] Michelsen, Claus, Marius Clemens, Guido Baldi, Geraldine Dany-Knedlik, Hella Engerer, Marcel Fratzscher, Stefan Gebauer et al. “Deutsche Wirtschaft in der Rezession: Engpässe überbrücken, Vertrauen stärken, Nachfrage anschieben.” DIW Wochenbericht 87, no. 12 (2020): 188-191.

[4] Storm, Servaas, and C. W. M. Naastepad. “Crisis and recovery in the German economy: The real lessons.” Structural Change and Economic Dynamics 32 (2015): 11-24

[5] Michelsen, Claus, Marius Clemens, Max Hanisch, Simon Junker, Konstantin Kholodilin, and Thore Schlaak. “Deutsche Wirtschaft: Corona-Virus stürzt deutsche Wirtschaft in eine Rezession.” DIW Wochenbericht 87, no. 12 (2020): 206-229.

[6] BBC News. 2020. “Coronavirus Pushes German Economy into Recession.” BBC News.

[7] Gropp, Reint, and Carlo Wix. “Langfristige Konsequenzen der Finanzkrise 2008/2009: Nachsichtige Regulierung schadet, flexible Löhne helfen.” Wirtschaft im Wandel 25, no. 2 (2019): 27-31.

[8] Dahles, Heidi, and Titi Prabawa Susilowati. “Business resilience in times of growth and crisis.” Annals of Tourism Research 51 (2015): 34-50.

[9] Manzaneque, Montserrat, Elena Merino, and Alba María Priego. “The role of institutional shareholders as owners and directors and the financial distress likelihood. Evidence from a concentrated ownership context.” European Management Journal 34, no. 4 (2016): 439-451.

[10] Nienhüser, Werner, David Peetz, and Georgina Murray. “Wem gehören die großen Unternehmen? Restrukturierung des Eigentums während der Finanzkrise in Deutschland und den USA.” WSI-Mitteilungen 69, no. 8 (2016): 584-594.

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