Pinnacle Business Solutions
Financial Review Issue #31

 Restructure Your Debt and Stay in Business

Debt Restructuring  

The U.S. Small Business Administration reports that approximately 40,000 businesses close their doors or file for bankruptcy each month. Many of these businesses were buried in debt with no viable plan to dig themselves out. All had hopes that things would get better.  Getting a business out of debt or in control of its debt requires a plan that can be executed with discipline and patience.  It requires spending time and effort to properly repay your creditors to the extent your business is able.

Debt restructuring is a process of negotiating new payment terms with existing creditors with a purpose of satisfying your creditors based on a budget you can afford in an effort to avoid lawsuits and bankruptcy.  Restructuring includes reducing the amount owed and/or stretching out the time period for making payments to creditors.  Debt restructuring can keep you in business, extend your payments over time, and possibly save you money. If a true hardship is properly presented to your creditors, many will go outside of their normal collections procedures. Furthermore, many creditors can save money (collection fees, legal fees) by working a deal out with you.  We should note that debt restructuring does not preserve your credit score.  Most likely your business credit score will decrease during this process.  

Here are some of the key components of debt restructuring

  1. Determine how critical your debt problem is
  2. Identify which debt needs to be restructured
  3. Project how much you can afford to pay toward these debts on a monthly basis
  4. Consider the future profitability of your business
  5. Determine how much time and effort you can devote to the restructuring process
  6. Create affordable settlement offers
  7. Negotiate with creditors and collectors and reserve funds

Signs that you need to restructure:

  1. Having difficulty paying current bills as well as past due debts
  2. Putting off debts you had planned to pay
  3. Already negotiated payment terms with creditors, but can't afford them
  4. Paying smaller creditors first while dodging larger creditors that potentially pose a bigger threat to the company
  5. Being contacted by a collection agency or being sued
  6. Bouncing checks
  7. 30% or more of your payables are over 90 days past due

Which creditors should be restructured?
You don't have to renegotiate with all creditors.  You should put your creditors into 3 groups:
Group 1 
.         No longer want to do business with you
.         You no longer need to do business with them
.         Have stopped giving you credit
.         Are not critical to your survival 
.         Have threatened or placed you in collection
Group 2
         Are still willing to sell to you
         Are not pushing for any past due balance
         Their products or services may be important, but can be  repurchased somewhere else
Group 3
         Are critical to your survival, without their products or services, you would be forced to close your doors, there is absolutely nowhere else you could get those products or services
Some creditors will do business with you on a COD or cash basis while you negotiate the past due balance with them.  If they refuse to do business with you, their competitors may take advantage of the opportunity to get your business.  Once you have classified your creditors, add up the amounts you owe each group. The first thing to make sure of is your ability to pay Group 3 according to their terms.  All of Group 1 should be restructured; review Group 2 to determine how much should be restructured.  The tighter your cash flow is the more of Group 2 should be restructured.  Add up all the debts that should be restructured.  

Settlement offers
A complete settlement proposal to your creditors should include a discussion of your hardship (i.e. personal tragedy, disaster, serious business problems etc.) your proposed payment plan and your business history which gives the creditor a summary of your historical financial performance and the basic reasons for the hardship.  Don't expect your creditors to settle quickly and easily, they won't. Each will react differently.  The goal of restructuring is to satisfy creditors with what you can afford.  This will be done with combination of reducing debts and extending payments out over time.
Negotiate with creditors and reserve funds

The day you send out your first set of offers is the day you should set aside the amount of your monthly budget.  These funds are sacred and should not be used for anything else.  Keep records of how much has been set aside and how much has been paid out.  Your creditors won't necessarily take your first settlement offer. However, the longer it takes for a creditor to settle, the more money you can accumulate for future settlement purposes.  Use your reserve funds prudently, just because a creditor makes an offer that sounds good, doesn't mean you can or should take it. In some cases, a generous offer from a creditor may still be unaffordable, especially if it requires all the funds to be paid immediately.  Lastly, realize that things don't always go as planned.  An unexpected business problem can arise to derail your repayment promises.  Stay on track by having a plan and retaining your credibility with creditors and business partners by keeping them informed of any changes that may affect them.
If your business is: starting to have difficulty paying current bills and past due debts, being contacted by a collection agency,   bouncing checks or has 30% or more of its payables are over 90 days past due, you may want to give serious consideration to debt restructuring.  It could be the difference between staying in business or having to close your doors.
If you would like more information on these financial planning ideas or any others please give us a call! 

Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
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Key Points of Interest

Signs that you need to restructure:
Having difficulty paying current bills as well as past due debts, Putting off debts you had planned to pay, Already negotiated payment terms with creditors, but can't afford

A complete settlement proposal to your creditors should include a discussion of your hardship (i.e. personal tragedy, disaster, serious business problems etc.) your proposed payment plan and your business history
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