Thousands of business owners find themselves in a hole every year. Understand that you are not alone and there is a way out. While it is scary to think that you may not be able to make payroll or that creditors are coming for your house. For the majority of business owners, there are options available to get out from the pinch they find themselves and their business in.
What to do in order to get your business cash flow positive
You have a number of options to get out from underneath the debt that you’re in.
The majority of business owners will do one of three things:
- Cut marketing expenses
- Take out a merchant cash advance (MCA) or another MCA. We’ve seen as many as 9 in a business at once.
- Try to get more clients and get them to pay up front.
- Renegotiating your business debt and payables should be the first step that you take to turn a business around. If this business is under new management or has a new investor, it is typically best to have this new shareholder call as they will likely be on better terms with the creditors.
- Restructuring the company through a UCC article 9 short sale proceeding or a chapter 11 business bankruptcy proceeding. You can read more about debt restructurings here.
- Liquidate the business assets to pay the creditors. While this is not your first choice, the business assets could be liquidated through a chapter 7 bankruptcy to pay back creditors.
Remove My Business Debt
If you are a US based business with at least $100K in business debt, we have a number of options to get you out of the position that you’re in.
If your business is not of interest to us, we will refer you to one of a few other businesses that we think highly of that will be able to work with you to remove your business debt.
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Debts to lenders, suppliers, etc.
Real estate, equipment, receivables and other business assets that you own.
What went wrong in your business
You’ve likely heard the saying that 95% of businesses fold within the first 10 years. A less known statistic is that even after the business has been operating successfully for decades, it still has a sizable chance of failing. The primary reasons that business owners find themselves in a hole are:
- More debt than the business could handle (SBA and MCA are most common)
- Law suits
While being a business owner can be freeing at times, finding yourself with your back up against the wall and having creditors call relentlessly is certainly not a desirable spot to find yourself. In this article, we hope to explore a few options that business owners have to turn their business around, pay off their debt or at the very least save their personal assets
1. Your business can't service it's debt
Around half of the businesses we see that are in trouble are in that position because they have more debt than their business can support. Often times, business owners will take out a loan thinking that their current trajectory will continue indefinitely. However, there are hard times that hit all businesses and leave many business owners with more debt than their cash flow can pay off.
Personal guarantees and how to work around them
If you’re like most business owners, you signed a personal guarantee for your business loan. This means that the bank has claim over all of your assets including your primary residence.
While these creditors can liquidate your assets to get their money back, it is important to understand that they don’t want to. Taking claim over assets and selling them is time consuming, expensive and often leads to them still losing money.
A better alternative for all parties is to negotiate terms on which the borrower pays back all of them money on longer terms. This way, the lender still gets all of their money back and the borrower doesn’t have to declare bankruptcy or wind their business down.
See how we operate as strategic consultants to invest in businesses, turn them around and help them avoid bankruptcy.
Negotiating terms with a lender
The problem with negotiating new terms with a lender is that they are typically pretty frustrated with the business owner for not paying them and likely not returning all of their phone calls. The negotiation should therefore be done by a professional at debt reduction, a new business owner or new investor.
At Minerva, we can invest in and acquire businesses that have cash flow issues and have been able to get the business owner off the hook from their personal guarantee and get more favorable financing terms in a couple cases.
2. A law suit may have your business upside down
Law suit is the second most common killer of main street and lower mid-market businesses. Often this is a client who feels that they were wronged in the day to day operations of business. It is also often times an employee or former employee who claims that they were mistreated at some point.
All business owners know that it is important to have lawful agreements in place and documented with everybody that you do business with. However, it is also important to understand that even you are still at some degree of risk depending on what the claims are.
Settling with a plaintiff
It may be in both your best interest and your plaintiffs to settle out of court. This process would be much quicker and both of you can avoid costly legal fees. If this is not an option for you, you will simply have to bite the bullet, go to court with the case and hope for the best.
3. Cash flow problems due to recession.
Recessions are natural in business. While cyclical recessions that affect only one or two industries may be damaging to your company, economic wide downturns are the real business killers.
While it is often difficult for business owners to cut expenses, if the clients and customers are not there, you simply have no other option than to downsize your business and cut overhead. This may mean finding a smaller facility to conduct business out of, letting go of employees and any other discretionary expenses.
If the debt burden your company has is the problem, you can look to our article about restructuring loans to help give your income statement some breathing room.
How to recapitalize your business during a recession
While it will almost certainly be hard for your business to operate during an economic crisis, it is at this time that the government and the SBA typically step forward with opportunities and programs to help put capital back into main street and mid-market businesses. Programs like the PPP can help many businesses stay afloat and should be entertained as a first priority.