Biz911

It can be catastrophic to lose equipment that is needed to generate business income.  Unfortunately, when sales are down and costs have already been cut to the bone, it still may be impossible to keep current with essential equipment lease payments.  That’s when the real trouble starts.

Once the leasing company, or lessor, starts to send threatening letters or enlists the help of a law firm, you have to act quickly and effectively.  

Assuming that you have realistic plans to get back on track with revenues, you must to be able to communicate to the lessor that you need its help and consideration.  It helps to provide information on:

1. what precisely caused this problem, together with
2. the current status, and
3. outline of your strategy for a turnaround. 

The lessor wants to keep you as a paying customer.  Its willingness to restructure payments or to give you a break in the total sum owed will be influenced by the percentage of monthly payments made to date and the equipment’s estimated garage-sale value.  It does not want to lose out, big time, if your firm goes under.  

A key to resolving lease issues is to recognize the lessor’s potential loss.  It is generally understood that businesses operate in an imperfect, risk-laden world.  A lease is not an annuity.  It is your job to bring out the necessary facts and propose a realistic, practical solution. 

Your proposal has to be aimed at the lessor’s best interests, emphasizing the upside of doing wihat you suggest and the downside if not.  Given that the lessor has lost a certain degree of faith in your ability to make monthly payments – restructured or not – you have to give it some confidence in your ability to follow through on a payment schedule that your firm can sustain.

Equipment lease disputes can appear to have no solution to troubled business owners and managers at the receiving end of hostile telephone calls and correspondence.  

These issues can be compounded by replevin law suits, the intent being to have the sheriff turn up with a court order to seize the equipment.  This could traumatize you and your employees and suck the life blood out of your business. 

The essential thing is to act quickly and decisively, before the problem gets worse.  Don’t make false promises that will prove impossible to meet.  Get professional help to deal with the issue. 

Your time is better spent in developing new ways to generate business income than in the uncharted territories of dealing with a lease dispute that may be critical to your business survival.

Businesses in desperate shape can often be saved.  Frankly, not all should.  Maybe the market is not there, or management isn’t up to the task.  But if the business shows resilience and the potential to thrive, disputes can generally be satisfied to meet the needs of the company and its creditors’ alike.  This takes effective communication.  The exception is where conflicts are based on personal issues, such as rancor, distrust and even hatred, rather than on rational, financial considerations.

A business in trouble can become beset by those who understandably feel justified in getting as much as they can, in short order, while paying little heed to its potential to give them lifetime customer value.  These complex debt issues can involve banks, equipment lessors, landlords and trade suppliers.  As well, business partners may be fighting with each other.  To those involved it can seem like an irreconcileable mess.  Everyone wants their bite out of the company and are prepared to pay for good legal help to get it.    

It’s easy in this situation for accounting or legal professionals to view the situation as hopeless and recommend bankruptcy.  But Chapter 11 will cost tens of thousands of dollars, padding the pockets of the professionals involved, rather than being used to make proportionate reduced-cost settlement payments to creditors.  This loss of cash to the company and its suppliers is one of the reasons why most Chapter 11 filings are quickly converted to Chapter 7 liquidations.

When a company’s creditors look out for their immediate self interest, it can kill the business, together with the unsecured suppliers’ hopes for getting paid.  It’s akin to the well known “Tragedy of the Commons” scenario, which describes the dilemma where individual livestock-owners see it in their best interest to add more and more cattle to the commons.  It makes sense in the short term, but it results in the eventual destruction of the commons’ ability to function as a productive grass-producing system.  And if the grazing disappears, everyone loses out. 

To head this off, all the livestock owners would need to understand that it’s in their best interests to control their desire to get everything they imediately want.  They would need to come to realize that they are playing a part in killing the productive asset that they need, unless they hold off.  Someone would likely have to get them together and let them know the situation.  It’s a similar scenario in complex business debt workout situations, when you communicate with creditors and ask for their patience and understanding.

The key in resolving complex debt predicaments is to get everyone (whether or not suits have been filed) to step back and take a holistic view of the problem. In the short term, they can minimize their losses.  In the longer term, they can maximize their benefit with a strengthened business relationship and loyal customer.  

This process akes place by thoroughly analyzing the situation and assessing the claims of each and every one of the creditors.  It is effective to start by putting together a simple report, for distribution to them, outlining the issues and alluding to solutions that would move everyone forward.

Time is of the essence.  If a suit has filed and served, it has to be answered.  The plaintiff has to be tied up in court by competent legal counsel for long enough to get the overall situation resolved.  

If your business faces multiple creditor issues, tackle the situation in a holistic way.  If you handle each issue in piecemeal fashion, you will be less likely to succeed.  

The real estate entrepreneur had come to realize that she was in a real bind, for which there seemed few positive outcomes.  She felt boxed in from all sides and was behind in payments to several lenders.  Her income was way less than planned and the price of her main asset had declined.

The lenders knew her situation and her plans for recovery in fine detail.  They had gotten the information in writing.  But they were showing little cooperation in her need for business debt relief at this stage and simply demanded to get paid, immediately.  Precisely how these funds were to materialize was of no interest to them.

A lender will obviously expect to get paid according to the terms of its contract.  No doubt about it.  It will only accept a compromised settlement when it knows that it cannot be repaid in full.  We believe that, with adequate information, the lenders will come to this realization and we will be able to cut the necessary deals, once we have the ability to do so.

The client is smart.  She has that upbeat, resilient quality so typical of a true entrepreneur.  She understands that where she is now is no reflection on where she will be in twelve months, or five years.

It’s all in the head.  Rather than going to pieces, she is proactively looking at new strategies to bring in cash and is open to doing anything possible to minimize the damage to herself and her creditors.  Given the lessons learned in this situation, she is poised to join the legion of successful business owners who have gone through adversity in their way to wealth-building success.

As with so many other of our clients facing financial challenges, it is extremely satisfying for us to be able to support her in this endeavor.

We can only get what we want in life by catering to the needs of others.  Most of us learn this as we grow up.  It’s a basic concept that we have to constantly bear in mind, in our personal lives and as business owners.  After all, if our marketing and negotiating strategies are all about us, we’re in for deep disappointment.

As turnaround management specialists we often see the impact of troubled companies screwing up their chances for business debt relief and recovery by failing to consider the needs of their creditors.  Many of us have personal experience of being stung by those who have failed to pay us as agreed.  In the absence of any communication from the debtor firm, and after wondering what’s going on, the next question might be whether or not other creditors are being paid ahead of us.  And then we really start to get ticked off.

The fact is, if nobody at the debtor firm tells us what’s going on, who will?  If we don’t get voluntary feedback, or answers to our correspondence or telephone calls, we are likely to come to our own conclusions.  And these will paint a pretty poor picture of the situation and the individuals concerned.

It can come as a pleasant surprise to a creditor if its late-paying contact takes the time to level with them as to why the account is delinquent.  Candor tends to build relationships, not ruin them.  We are not catering to the creditor’s primary need to get paid when we act as straight-shooters, but at least we are doing the right thing to explain why the situation does not currently permit full payment.

It may be human nature to want to avoid unpleasant tasks, but an honest appraisal of your situation, shared with your creditor, can open the door to a settlement on revised terms, to meet your priorities.

As with effective sales and marketing practices, success in business debt reduction negotiations is fundamentally concerned with catering to your target audience’s needs.  If more business people would understand this, there would be a lot less need for collectors, lawyers and expensive litigation.

After getting into financial trouble, good business people can become consumed with guilt about not  paying suppliers as agreed.  Sometimes they become frozen with “debt denial” because it’s just too painful an issue to confront head on.  This feeling can be compounded if particular creditors are other small business people in similar circumstances, known to be tight for cash themselves.  The whole thing can result in procrastination and the perceived inability to do what it takes to save the business.

It can be hard to admit to ourselves that drastic steps have to be taken when the going gets tough.  It’s often easier to keep on the same course, hoping that circumstances will change, as did Dickens’ Wilkins Mikawber, who was always sure that “something will turn up.”  And this attitude didn’t help.  He ended up in the poor house.

The fact is, if tackled early enough, most businesses can cost-effectively do what it takes to ramp up revenues, even in today’s economic environment.  It may take help from outside, from someone who can take a more objective look at the situation.  But it makes no sense to let the business get to a point where cash flow dries up.

It really does help to identify the cause and remedies for decreasing cash flow at an early stage.  If it turns out that you need to delay payments and cut deals with creditors, do it as early as possible.

If you wait too long – incapacitated by debt denial – you may delay until it is too late. Eventually your business will reach a tipping point, where projected revenues have no chance of settling outstanding debt,  beyond which there can be no return.  And this would leave your unsecured creditors in the cold.  Not a good prospect, when you could have gotten something to them earlier and saved your business in the process.

I enjoy watching the Gordon Ramsey TV shows – both the US and British versions.  If you haven’t seen him, in each episode he typically goes into a poorly-performing restaurant and does what it takes to turn it around.

Ramsey knows how to focus on what’s needed to emphasize the owner’s skills and to market the product to willing customers.  He knows how to build publicity and the whole thing is very entertaining, as well as satisfying, because he generally ends up with a re-born business.  And this preserves jobs and family relationships.

While you might question Ramsey’s personal approach, he usually gets reluctant owners past the denial stage to see new, productive ways to run their businesses.  I don’t question that he gets the job done.  It’s just that I hope that nobody shoots him in the process.

One thing really bugs me about the program – its treatment of out-of-control business debt.  In one episode, a New Jersey restaurateur, awash in red ink, was driving a top of the line Mercedes.  His costs were clearly out of line with declining revenues.  A creditor turned up one evening to ask him about paying his bill.  He had a right to do that, as his telephone calls were likely ignored.  The owner went ballistic and had to be restrained, hurling fists and invectives at the man who should have been thanked for extending him credit.

It might make good TV, but it’s no way to run a business.  The chance was missed to point out the right way to handle this common situation.

In at least one other episode we learned that the restaurant later went out of business, despite Ramsey’s ministrations.  The debt load was said to be too high to carry, even with the increased revenues.  And that’s tragic.  The situation begged for professional help to respectfully reconcile the needs of creditors with those of the business.  Everyone lost out.  It’s about time that Ramsey started to bring in business debt relief specialists, when needed, to ensure that these good restaurants survive in a way in which everybody wins.

Clients sometimes ask how much a particular creditor is likely to accept in a negotiated settlement.  The answer is, it depends.  And it depends on factors affecting both sides.

One thing applies at the outset.  If you agree that the money is owed and can afford to pay the whole amount without any problem or hardship, then you should pay it.  No ifs or buts.  Anything less would be fraudulent.  On the other hand, if your firm is going through a tough time and you absolutely need to restructure your debt and increase your cash flow, then you have an obligation to pay as much as you can without pulling your business under.

The other side is more likely to agree to your proposal if it has built up good relations with your firm.  It may anticipate significant lifetime customer value if your firm survives.  It helps if it deals with a high margin product or service, where it does not stand to lose too much in a discounted settlement.  And it may be averse to getting involved in litigation to collect the sum due.

It will also help your cause if you have a good payment history and can show that your firm has been hit by an outside event, such as the bankruptcy of a major customer.  If you can also show that your firm is “judgment proof” or that it may go out of business if pressed, then the creditor may assume that it has too much to lose by pursuing the matter in court.

On the other hand, the creditor will take a tougher stance if it has hide-bound, inflexible policies and has little or no experience with your firm.  It may want to pursue judgments “at any cost.”  And it may have sold you a low margin product or service, meaning that it stands to lose most of the cash in dispute if the account goes unpaid.

The situation is worse if the creditor perceives your firm’s management to be deceptive and to have attachable assets, ripe for post-judgment seizure.  And personal guarantees can further harm your case.

The eventual settlement figure will obviously depend on a number of factors, of which these are a few.  A seasoned debt management professional will best position your firm to get the results you need.

What will the other side accept?  It depends…