The continued success of a struggling business depends on the business owner’s ability to make prudent decisions under financial stress. In 25 years of representing struggling businesses (and unpaid lenders), I have witnessed many bad business decisions. In this article, I’ll share some of my experiences in order to help you avoid making the same poor choices for your business.
A “struggling business” is an enterprise that has had past success in paying payroll, taxes, rent and other operating expenses in a complete and timely manner, but now, finds itself in a situation where it is no longer selling enough products or services on a monthly basis to meet its monthly expenses. When this happens, business owners are placed under great emotional and financial stress. How those owners deal with these stresses can impact the ultimate fate of the company.
The worst decision a business owner can make is to not pay their taxes. Delaying the payment of payroll withholding and employment taxes, sales taxes, etc. can be fatal to both the business and the business owner. The federal government offers little flexibility in matters of payment plan negotiation and tax debt reduction. To make matters more difficult for business owners who neglect their tax obligations, the federal government also has strong collection powers. For these reasons, taxes must be the savvy business owner’s first priority.
It is also foolhardy to not pay rent if there is no alternate location from which to run the business. Remember: your landlord has quick access to the courts to obtain clearance for an eviction. If you are evicted and have nowhere else to operate, your business has effectively been terminated.
Pay Down Preexisting Long-Term Debt
The next priority is the payment of long-term debt to a creditor, such as a bank, with a lien on the business assets. This includes accounts receivable, machinery and equipment, inventory, etc. Creditors with collateral, also called secured creditors, cannot act as quickly as the government or your landlord — but they do have access to expedited court remedies which can destroy a business as thoroughly as an eviction or the nonpayment of taxes.
Before missing a payment to a creditor with collateral, the business owner should take three steps:
- Meet with that lender.
- Disclose the financial problems at hand.
- Attempt to negotiate a new payment plan.
Ignoring these types of creditors doesn’t make them go away. It only makes them angry, and impedes the resolution process. It is always better to be proactive and try to fix a problem, rather than passively hoping it will fade into oblivion. That simply isn’t an effective strategy.
Trade creditors with no collateral (unsecured creditors) have the most difficult time collecting debts, which does provide some leverage in the negotiation of pay-outs. Trade creditors usually want to keep the struggling business as a customer if it has been a good customer over the years, and will usually make an effort to help resolve the situation.
Whatever debt issues your business may be facing, avoid the temptation to borrow on a line of credit to meet cash needs. This can be fatal. The credit line should be used only to cover the delay in collecting strong accounts receivable, and should be repaid immediately when the customers’ payments come in.
On the other hand, borrowing money because the business is not generating enough sales to meet operating expenses is a temporary fix which will only cause more damage in the long run. If the company’s problems are not addressed because the company can simply borrow money, that money will soon run out – but the problems will still be present, unsolved. Only now, the problems have actually expanded to include the repayment of the borrowed funds.
In the end, the best decision for a struggling business is the decision to seek professional help from a business consultant, accountant or attorney with experience in providing advice to businesses during times of financial hardship. While this may create an additional temporary expense in a time when cash is short, it is the smartest financial decision for resolving the crisis and saving your company in the long term.
About the Author:
Paul Maselli is a commercial bankruptcy attorney in New Jersey. His law firm represents businesses in general corporate as well as loan workout and bankruptcy matters.