|
Paying off unanticipated debt
Dear Small Biz Adviser:
We own a Mail Boxes Etc. and didn't have working capital to get
us through the first few years. Some bills mounted up, about $20,000
worth, that we'd like to pay off. The business is making enough
money now so that we could easily keep up with bills after this
is paid off. What's the best way to do this as far as loans, etc.,
go?
Diana
Dear Diana:
Like they say, hindsight is 20/20. I certainly wish you had anticipated
these expenses. I suspect the $20,000 relates to one-time expenses
for which you are paying in the form of a note payable, lease installments
or credit cards. If the bulk of your debt went into the purchase
of tangible assets, then you have collateral from that investment
toward any loan application.
So what can be done to pay off
this debt? Consider some of the following:
Discuss your financial condition
with the creditors.
Attempt to negotiate a restructured payment plan that can ease the
burden on cash flow and cash reserves. You may consider extending
the present payment plan, getting a minimal increase in any interest
terms that may exist, or both. How far you go with those negotiations
depends on the person and company with whom you negotiate. Clearly
state upfront that renegotiating the debt increases the likelihood
of timely payments, added earnings to them through interest and
minimizing or eliminating their potential loss from having to shut
down or sell the franchise.
Talk to a commercial lender.
Go to the bank(s) where you conduct your business. They certainly
don't want to see you fold. Your success is their success. If anything
can be done, they will certainly attempt to help. However, recognize
they cannot extend their risks. You will have to show the company
is profitable and how much more profitable it can be if the $20,000
liability is paid out through a bank note payable. You will also
have to ante up collateral. No bank, especially in the present economic
environment, is willing to take a risk on unsecured debt to a small
business.
Consider deferred compensation.
Bankers use this term to describe the condition in which the owners
defer paying themselves a salary until cash flow is positive and
cash reserves are sufficient to pay regular operating overhead and
monthly installments on long-term debt. This may be an option to
consider when applying for a bank loan or negotiating with the creditors.
Take on a partner.
Look for someone who is willing to pay off the debt in exchange
for part ownership in the business. This reduces your control and
personal profit margins, but it may be the most attractive alternative
if the bankers and creditors are not willing to help.
Use credit card cash advances.
This is feasible only if the indebtedness is not in credit cards,
you pay off the debt at an accelerated pace and none of the other
alternatives above is acceptable. I would not consider
this. However, credit card companies have recently promoted the
transfer of debt to your credit card in exchange for lower interest
rates on that particular portion of your total credit card debt.
So it may now be more attractive than in the past. However, avoid
securing credit cards with high interest rates.
Sell the business.
If none of the previously discussed possibilities work out, this
may be the only option.
It appears that your revenue is
exceeding normal operating overhead and costs of goods sold. That
is a very positive situation to be in. I wish you well on diminishing
your debt and moving forward with your business.
-- Posted: July 26, 2001
|
