This is a great topic that I rarely talk about so I asked someone who is an expert in dealing with business debt to provide this awesome point of view and advice on how to deal with problematic debt issues. Dealing with business debt issues for the business owner can be a tough emotional struggle as they attempt to rescue their business, save their employees, and maintain their income. So let’s read the advice from Charles Evans.
You have probably heard that there are over 25 million small businesses in the United States, but did you know that almost three quarters of those businesses, or 22 million, have one employee and many of the rest have just a few? These are our plumbers, electricians, home businesses and small stores; true mom and pop companies. So, what happens when they get in trouble with too much debt?
To begin to answer the question, let’s a take step backward and look at how many small businesses begin. Often they start with a dream, a customer, some savings and personal credit cards. Overtime, as sales increase, a business naturally looks to take on new forms of commercial debt to expand, buy equipment, develop a cushion and have credit in reserve. A few examples of commercial debt include: business credit cards, equipment leases, Small Business Administration (SBA) loans, bank lines of credit and vendor debt.
While most businesses have ups and downs they can survive by tightening expenditures and using credit, sometimes there are big events that can threaten the survival of the business. As a small business debt restructuring company, here are the top reasons we’ve found why businesses fall behind and develop too much debt to survive:
- The owner/operator got sick
- A large customer went bankrupt
- A competitor opened up nearby
- A salesperson left with a big account
- A local or national recession
- Street traffic was interrupted due to construction
- Employee theft
- Machinery breakdown
- Fire or flood
As you’ll note, most of these events are not necessarily the result of poor management decisions, but any one or a combination can easily cause an undercapitalized company to consider bankruptcy or shut down by interrupting cash flow and sales.
So what does a small business do when its life is on the line? They may first turn to their bank – but they likely already owe them money and banks do not want to lend more money to pay back other creditors. Banks only want to lend when things are going well and expanding.
Can things get worse? They sure can. We have helped over 11,000 businesses in this predicament. Many of our clients first attempted to negotiate on their own before they sought professional guidance. Following are two examples of mistakes they made. At first glance, their decisions seem reasonable but it usually turns out that they made the exact wrong decision, because the decision was often proposed by the creditor.
Keep in mind that creditors and collectors are trained professionals. One of their tactics is to propose solutions that get money in their hands. A small business can’t rely on consumer protection laws to offer any buffer or a safe haven. Most of the laws for consumers do not apply to commercial credit and collections. Commercial collection tactics can be extremely harsh; lawsuits and judgements will fly.
Here is an example: A creditor calls and says: “… you owe us $10,000… now I understand you’ve had some difficulties, so we are prepared to offer you a settlement of $5,000 over three months….” Many businesses owners under stress might agree to this right away, after all, it sounds great, you got rid of that looming cloud, a possible lawsuit, and you saved $5,000; you’re a negotiator!
Here are the possible mistakes with that scenario:
- the settlement, even if it is in writing, may contain fine print and is on their terms. Violate that settlement and the debt goes back to $10,000, minus money you’ve sent, plus possible additional charges, a bump in interest rates and resumed collection efforts
- You wiped out your cash on hand that you may have needed to take on new jobs. This was a settlement that you could not afford even though it sounded good
- What about the other creditors? – now you have nothing for them.
Here is another example: You have leased equipment. The creditor calls and says: “… pay us or we will come take the equipment…” You say: “Ok, I don’t use that equipment much anyway.” Headache removed? No, the lease company sells the equipment at auction and comes back after you for the difference, or “deficiency balance.” Result: you don’t have the equipment that you may have needed, you still owe money and collection tactics escalate.
There is another series of pitfalls that can absolutely strangle a small business and these are high interest loans commonly called “advances.” This is a broad enough subject that requires another blog for Steve Rhode’s site and perhaps we’ll get to that in the future, but here are the crib notes: There is a lot of very high interest money available to small businesses. The amount of money offered is based upon available cash flow in the bank account. It is high risk money, so the interest rates are sky high and people under stress do take single or multiple loans/advances. It may only become apparent after a short while that the advance itself is dragging the company towards bankruptcy. In these instances described, a small business needs a complete plan that considers all the debt and survivability based on the available cash-flow.
We have covered a lot of ground in this blog and I’d like to assure you that it’s not all bad news. In fact, we’ve written a couple guides and published a lot of material for small business owners to learn how to get out of debt, avoid pitfalls, negotiate and source professional help.
To learn about business debt restructuring and how we can help visit us at www.DontDeclare.com.
You can download our free 16 page guide: “How to pay business debts you can’t afford.” The guide offers templates, calculators and great advice that applies to the consumer and commercial world.
Author Bio: Charles Evans is Director of Business Development for Corporate Turnaround in Paramus, NJ. For over 14 years, he has helped train thousands of business counselors with both SCORE and the ASBDC [Association of Small Business Development Centers] in business debt management. He also serves on his regional Small Business Development Center Board and served as Executive Chair for the Bergen Workforce Development Center. He can be reached at [email protected] dot com
If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.
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