No new business owner ever wants to default on a loan. Most startup founders are pretty cautious about borrowing anything until they are confident of their ability to repay debt and move ahead with he growth of their company.
But with the advent of peer to peer lending, enormous growth in private debt markets and a host of other means to access small amounts of borrowed money, more new business owners than ever before have or had working capital in hand at a very early stage of business growth.
Sometimes too early.
By that I mean that the business owner did not have sufficient cash flow to meet the debt service required under the loan arrangement, and did not get to a point where it could be met before there was the need to default.
Often the need to default arises when the business owner is faced with a choice of having to pay for current expense needs of the business versus making loan payments as they come due. It happens. Frankly, it happens often.
So what do you do if you are the business owner forced into a default situation?
The reality is that the creditor needs to make business decisions about collection, just as the debtor must make decisions about what to pay for to keep the business going today and tomorrow. While no creditor ever wants to write off all or a portion of his receivables, he may not have a better choice.
The effort to collect the full balance on a note or account may involve many years of collection efforts at great expense, while passing up the opportunity to collect something presently, or for a long time to come.
So what should the business owner/debtor do if he does fall behind on a loan? After taking the most obvious steps of reining in the expenses you can and refocusing on immediate sales and revenue within your own company, here are some key suggestions to help you get out from under the weight and burden of debt you’re not yet in a position to repay.And make no mistake here – my first advice is always to determine whether you’ve done everything you can to generate the cash flow needed to make this loan work. Bt when you just can’t accomplish that, here is what I recommend:
Make an Offer
There is no crime in going to the creditor and letting it know what the best you can do in the moment is. The worst they can do is say “no”. You might even expect that – but it isn’t a guarantee. Depending on who the creditor is, once in awhile, they will say “yes” or at least “maybe”, which opens the door to deferment of payments due. That is often the best outcome for you.
If Refused, Leave the Ball in the Creditor’s Court (Don’t Make Partial Payments)
If the creditor says no, it isn’t the end of the story, but rather the beginning. You need a “so what” attitude at that moment, you just have to keep going. It doesn’t mean your business will be shut down or even that you won’t succeed. Most highly successful business owners have been in this place at one time. You don’t know what success feels like until you’ve been very near to defeat.
The best answer in this situation is to allow the creditor to worry about their asset (your loan) and for you to focus on yours – your business. In other words, don’t get absorbed by focusing on repaying their debt. In fact that is possibly the worst move you can make. You may waive rights that protect you from collections, tip your hand to the creditor in a way you don’t want, and certainly end up taking resources away from your business that could go to paying other more immediate expenses.
Retain Counsel – Seriously!
What it takes to hire an attorney (or at least a debt settlement advisor) when you are behind in payments, is nearly alway worth the cost. It won’t take that much for a retainer, and you may get billed infrequently or only after a settlement thereafter.
An attorney can assert defenses, position you for settlement, help you with a refinancing transaction, and most important, keep a creditor at bay until you’re ready to move forward.
Bankruptcy should be a last resort – something you don’t even consider until you’ve exhausted every other option, and in my opinion, until you’re facing the actual attachment of property you don’t want to give up.
There are usually many options better than bankruptcy. With that said, it’s fair to recognize that situations may arise that force you into bankruptcy because it’s the only way you can avoid losing collateral property, including your business assets. But I suggest doing everything else you can before choosing this route.
Don’t get used to not paying what’s due. It’s a bad habit to form and will come back to haunt you. Find whatever avenue you can to repay the debt – if you can. Repay at lower than the original principal amount, if necessary and possible, but repay it on terms agreed with the creditor following negotiation, settlement and a workout of the loan.
Your refinancing options will increase as you pay attention to your cash flow. While your credit may decline initially, after the first missed payment, you may be able to improve your credit score month by month by paying close attention to other payments.
When refinance options do present themselves, don’t jump at the first pre-approval that comes along. Shop, compare, evaluate – there are more options for business owners with modest or less than perfect credit now than ever before.
If you need help with a loan work out, debt solution, or other creditor/legal issue, call the Thompson Law Office at 317-564-4976. We have nearly 30 years experience helping business owners and families create the best solutions to problem loan situations.
“In the end everything will be OK. If it’s not OK, it’s not the end.”