Business Debt Help: 5 Tasks for the First Working Session

If your business is in trouble and you can’t pay what you owe, your first working session has five jobs, which is both more and less daunting than it sounds.

• List every debt you owe.
• Rank the debts by their monthly cost and by what each creditor can do to you if you stop paying.
• Find the cash flow gap: how much more or less do you need every month?
• Sort the debts that can be refinanced from what must be renegotiated, because each has different goals and costs.
• Decide whether you need professional help.

Your first job is to write the list. For each debt write down:

• the name of the creditor;
• the current balance owed;
• the interest rate;
• the dollar amount and frequency of payments;
• collateral pledged, a personal guarantee or confession of judgment;
• a contact phone number.

Don’t just write “credit cards”; note each issuer, balance, rate, and payment. When you’ve written everything down, total the monthly payment column. That is the monthly minimum amount you have to find. A debt paid once a month lets you plan how to make payments; it shows a roadmap. A debt paid daily takes cash off the top, which is hard on operating cash and stress. But listing every detail is surprisingly hard when the cash crunch hits. Fear and the need to do something now block clear thinking, and you may ignore anything that isn’t an emergency. Taking the time to list all debts is the first and most crucial step of the process. Don’t short-cut it.

Next you rank the debts in two ways. One is from highest interest rate to lowest, which is the usual ”debt avalanche” method. If you have the margin and the cash flow to keep every creditor paid, then that works. If you have to postpone some payments, your next ranking is to evaluate each creditor for the amount of risk to you if you don’t pay. If you are pinching, decide who can do the most damage and work on them first.

A secured loan is one whose collateral is pledged to the lender, and secured lenders can seize their collateral without asking a court, as long as no breach of the peace is involved. In contrast, a shortfall on a payroll tax is payable by the business, but can also become a personal liability of the owner if willful. On cost, one way lenders measure the cost of money is to show a ”factor rate” instead of an interest rate. The true cost can be far higher than it looks. Ask two questions of each debt: what it really costs, and what the creditor can do.

The cash flow gap is not the payments on the debt, it’s the amount of money that flows out faster than what flows in. You aren’t borrowing the money to play with, you’re borrowing to cover a difference between how fast you collect and how fast you have to pay. Reduce your payments, but first check to see if you have customers paying late. Speed up your invoicing, and follow up on old invoices.

The other cash flow levers are not much help in a severe crunch, but they buy time to negotiate a debt solution. Stretch out your supplier payments where allowed, cut discretionary spending, and question everything you spend regularly. You can also free cash tied up in inventory.

Refinancing a debt swaps it for a new one, usually at a lower interest rate or a longer term. A debt consolidation loan pools several debts into one payment. You can refinance if you still qualify for credit and if the new money costs less than what you have now. Cautions are that your company has to still pass underwriting, so a downturn, cash crunch, or slow payment history might block you from refinance. If your company is turned down for a bank refinance of debt, beware a call about merchant cash advances to pay off the old ones. Those advances are so expensive that they are usually just a way to reshuffle the problem and pile on more debt.

If a debt can’t be refinanced, it has to be renegotiated. Most lenders prefer a lower payment or longer term to a forced default. A repayment plan stretches the amount owed over a longer term, but you don’t have to pass credit standards to get one.

Government debt collection doesn’t follow the same rules that private businesses do. The IRS has an online plan for individuals, but not for businesses. The phone number on the notice from the IRS that you receive is a helpful place to start. The number 800-829-4933 is another helpful one. If you took a COVID EIDL loan, have a current payment or are under 90 days past due, still operate the business, are not in active bankruptcy, and have a temporary financial problem, you may be able to cut the payment by half for six months, which you can do once every five years. Don’t wait until your EIDL is over 120 days delinquent. If you go past that point, the loan can move into Treasury Cross Servicing, where the SBA can no longer help, and the Treasury Offset Program can become involved.

With any lender, call before you miss a payment. The lender is more likely to work with you to avoid a default than after one happens. Explain how you can afford to pay less for now, and offer a realistic payment plan that your cash flow can handle. Don’t commit to something you can’t do. Get the deal in writing, signed by someone who can change the terms of your loan.

One problem with working with one creditor at a time is that you don’t know what that lender is already giving to others. Negotiate one agreement at a time, and you have less leverage. Stacking is having several cash advance funders all debiting one bank account, each with their own UCC-1 lien on the same collateral. It’s possible to be in too much trouble for debt consolidation, but refinancing is not usually the solution to stacks, because the prior liens prevent a new lender from getting into first place.

Not every problem needs professional help, because some solutions can be found at your desk. But if payments eat payroll cash, you borrow new debt to make old debt, several creditors press at once, or default feels like when, not if, it’s time to get help.

There is one more step when you reach a debt settlement. If the lender cancels $600 or more in debt, they must file a Form 1099-C with the IRS. In most cases the debt forgiven is counted as taxable income.

You may be tempted to ignore the problem. Don’t. Set the panic aside, and make a list. Rank each debt by its risk if you can’t pay it, and by the interest rate if you can. Weigh a refinance by the cost of the new debt compared to the old one. If a refinance isn’t possible, call the creditor and negotiate. If the situation is too much, get help.