Four Tips for Working Out Your Business Debts

You can get out from under that mountain of debt. Here's how to make sure your bank works for you, versus the other way around.

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By Donald Todrin

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Four Tips for Working Out DebtsEconomists generally say we're not in a recession anymore. But many small-business owners will tell you it sure doesn't feel that way. Many still don't have the revenue they had back in 2007.

This reduced revenue has left business owners struggling to pay their monthly debt service for commercial real estate loans and equipment loans and leases. They're staring at all this debt and facing the prospect that it's going to wipe them out.

The good news is that all debt can be reconsidered -- and reduced, rescheduled and removed – not just worked out.

If you're one of these businesses owners, I strongly suggest that you focus first on bank-secured debt, especially loans backed by the U.S. Small Business Administration. That's because you've given those banks collateral that will end your business if those banks come to collect.

Related: The ABCs of Business Credit

SBA loans are even worse because the bank or banks you got them from will have to go through a series of steps, including shutting down your business and then liquidating the collateral in order to receive the SBA's loan guarantee. That's a devastating scenario.

The good news is that it's possible to renegotiate a loan with better terms. Here are some pointers you could follow to make sure your bank works for you, versus the other way around:

  • Don't pay the bank. This may sound contrary to logic, but the only way you'll get the bank to work with you is if you're in payment default. I find too many businesses that made the mistake of not paying their landlords or their vendors in order to stay current on bank loans. It should be the other way around. Make sure the landlord gets paid; don't pay the bank. You can't liquidate and destroy yourself to pay off your bank. Your bank won't work with you if your payments are current, so you need to get their attention and let them know there's a problem.
  • Talk to them immediately. So now you've stopped paying them. You've got to go see them in person, immediately, to discuss the situation. Then things start to happen. They start to adjust interest. You might get a delay in having to make payments. Changes happen. If you get skilled support from a seasoned expert in debt workout you can even achieve debt forgiveness. (Just as you shouldn't defend yourself in a court case, I strongly recommend that you shouldn't try to achieve debt forgiveness on your own because you'll whine, beg and plead your way to no results, as opposed to utilizing appropriate strategies.)

    Related: The Secret to Saving: Think Before You Spend
  • Have a plan. The best thing you can do for yourself is to come in with a plan of how you're going to boost revenue and reduce overhead to create the extra income needed to pay the monthly debt service for loan. The plan has to be based on numbers. You'll need to include benchmarks so the bank can see that you're on your way toward achieving the cash flow needed. Present a plan to boost performance that is based on hard logic and clear commitments over a specific time period so your progress can be measured.
  • Show you have adequate collateral. You have to do this without messing around. Pay $300 for an appraisal to demonstrate you have enough equity in your real estate to cover the loan. Demonstrate the value of your receivables. Banks might request that you bring in additional collateral. They'll give you an additional chance. Be sure you're going to win if you do that. The more you pledge, the more risk you're taking on. Frankly, I do not recommend putting more collateral on the line, but it may work out for you.

Sometimes, there simply comes a time to cut and run. There comes a time to say, "I can't do this." If the numbers do not work, you can file for Chapter 7 bankruptcy protection and move on.

Don't feel guilty about not paying back a loan to a bank. Entrepreneurs didn't start the Great Recession. You didn't fail. It was large financial institutions that caused this mess. So don't feel guilty about having to cut your losses. You must survive to start over again.

Related: Small-Business Cards Offer Rewards, Some Risk

Donald Todrin

Donald Todrin is the author of Successfully Navigating the Downturn published by Entrepreneur Press. Todrin is president of Second Wind Consultants Inc., a business-debt solutions firm in Hadley, Mass.

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