In this challenging economic environment, having slower cash flow is story that belong to any companies, any business people. The situation then put everyone in falling behind to pay. Everyone find it is hard to keep up with all its credit card, credit line, and bank loan payments. Sure, you still have to push your customers to pay on time or even faster (goodluck!). But relying on accelerating cash inflow tactic is just not so good move today. Let’s face that you’re over-leveraged. There is no space! You need to move your focus to your debts.
In other hand, ignoring the problem and simply withholding payment can lead to a barrage of nasty phone calls and letters from a collection agency. Not to mention the seven-year ding to your credit report. Failing in taking action may hurt your business. To avoid all of the above, get ahead of the problem and actively negotiate with your creditors to preserve vendor relationships and, ultimately, your business in the whole.
Here are four-serial steps you can take:
Step-1. Crunch The Numbers and Determine How Much You Can Pay
Pull your debt numbers, sort them by vendors (lenders) and due date. Having total debt by vendor and due date is truly tool for you to determine how much you can realistically pay, and to whom—in priority-like list. Once you have the list on hand, you can move to next step.
Settling debt is often not an option with secured debt, which is associated with a tangible piece of equipment or property that can be repossessed. By contrast, there is nothing attached to unsecured debt except a borrower’s promise to repay.
Step-2. Verify and Reconfirm Your Debt
So you have a list of your business debt on hand. The next step is to verify the vendor name and amount of each. Always request documentation of the debt in question to verify that it belongs to the business. Keep careful notes of conversations with any vendor representatives.
Finally, once you reach an agreement and before making payment, request a written copy of the terms, including a statement that the payment(s) will completely fulfill the debt. If that is not feasible, record the conversation if you are in a state that only requires one party (you) to be aware of the recording.
Step-3. Conduct Direct (You-to-Vendors) Communication
As a basic rule of thumb, adding a debt settlement firm to the mix tacks on hefty fees while distancing your business from the supplier(s) owed payment. Direct communication is vital, especially if you want these people to work with you in the future. You want to make sure you’re in constant communication to let the vendor know you are aware of the situation, and you’re actively working on resolving it. Sometimes that is enough to delay turning your account over.
Well, there is a case that you really need to hire a firm to help you restructure your debt. For such situation you would need to make sure to carefully research their background. Many fly-by-night companies spring up in bad times in this sector. Be wary of any company that won’t offer you a free initial consultation, or that asks for substantial money up-front to begin working with you. Get a referral from other business owners you trust, contact your Better Business Bureau to check for complaints, or ask staff at your local Small Business Administration office for advice on reputable debt-consolidation companies in your area.
Step-4. Make a Reasonable Offer Or Debt Restructuring?
A vendor or creditor is unlikely to accept a reduced payment if an account does not yet appear as delinquent. Accounts in arrears for 90 to 120 days, however, can be turned over to collections. If paying in full is not achievable, request a “workout,” under which both parties agree to a reduced debt amount. Most vendors prefer lump sum payments.
Essentially, there are three possible avenues for restructuring your business debt: renegotiating with each of your existing lenders for better terms, settling existing debts, or getting a consolidation loan that pays off all your current loans. Let’s look at these options one at a time.
(a) Renegotiate existing loans
This process involves someone calling each of your vendors (lenders) and asking them for new deal terms. Either you’ll call on vendors yourself, or hire a professional debt-help company to make the calls on behalf of the business. Before you start, consider this decision carefully, as changing loan terms can lower your credit score.
If you decide renegotiating is the best option for your business, it can be productive to approach lenders on your own first. Many lenders respond better when they hear a personal story directly from the borrower than they do when a debt company calls. If you talk with lenders yourself, be honest about your situation and tell them what you’re doing to get your business finances in order…but that right now, you’re unable to manage your payments and need to renegotiate.
There are several ways you could renegotiate the terms of an existing loan. For instance, you could ask to suspend payments for three to six months, with the loan to resume payments with the original terms after the grace period. Another strategy is to ask for an interest rate reduction, or for an extension of the loan term. Either of these latter two options would lower your monthly payments for the remaining time left on the loan.
(b) Make a settlement offer
In a settlement, you offer a fraction of the balance owed as payment in full. When the economy is down and they have more bad loans, banks are more open to entertaining settlement offers, as they need to get problem loans off their books. Settlement offers are more likely to be successful when it seems unlikely you will be able to pay the debt in full anytime soon. Debt settlement has the advantage of resolving the debt entirely. On the dark side, debt settlement may affect your credit rating.
It also can have a negative tax consequence, because the difference between the full amount owed and your settlement offer is considered taxable income. Be sure to consult a tax professional about the ramifications of any settlement proposals before you finalize any deal.
(c) Get a consolidation loan
Consolidating many different debts into a single loan usually results in a lower overall payment, especially if your business’s debt load includes some high interest rate charge cards. Consolidation should free up some of your cash flow to invest back into your business. This method has the advantage of paying existing creditors off and preserving your credit rating. With fewer payments to make, there’s also less chance you’ll be dinged with late fees, or that a credit card will hike your interest rates because of missed or late payments.
Carefully read your current loan covenants to make sure you won’t trigger any unexpected prepayment penalties if you pay off a loan early. Then approach your existing bank lenders to see if one of them might be willing to help you consolidate. They have a vested interest in seeing their own loan paid in full, so they may be a good resource. If your current banks aren’t interested, you may need a debt-consolidation company’s help to secure a new loan elsewhere.
Depending on how interest rates are trending, you could cut your payments substantially with a consolidation loan, but remember that fees and points on the new loan will add to your debt. You can get a sense of how much you’d save by consolidating your debts into a single, new loan with debt calculators.
Some may be willing to agree to a lesser amount (as much as a 30 percent to 60 percent reduction off the original debt) repaid over a period of several months, particularly if they think the business is on the verge of declaring bankruptcy. Consider providing a promissory note, personal guaranty or collateral such as a lien against equipment. Explain your situation honestly—in person, rather than a quick e-mail. Give specific dates on when you will make payments and honor them. By taking a proactive approach and communicating with vendors openly and honestly, you stack the odds in your favor for resolving the debt and engendering vendor loyalty.
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