Yes, in many cases you can. In theory, you can negotiate a settlement anytime, regardless of your business’s current financial state. People make the mistake of feeling like they can’t settle business debt unless they close their business down, not true at all. Plenty of businesses that are doing fine overall have one debt that is throwing the whole thing off. They’d prefer to settle it while making other payments as normal. The goal is to deal with that debt without jeopardizing the continuing operation of the business.
Whatever the bigger picture looks like, the immediate aim is usually the same: less money going out the door. One possibility is that the creditor can be persuaded to reduce the amount you are required to pay, in exchange for your promise to pay at an accelerated rate. If the money you’re paying out toward the debt can’t be reduced, it might be possible to get the creditor to agree to make the payments more manageable by extending the amount of time that you have to make the payments, or by making the payment terms more flexible. Or you could pay the entire balance you owe, but have interest rates reduced or waived.
So where does being profitable fit in? If the short-term debts, like business credit cards, are up to date, then you may not need to negotiate with your creditors in the first place. A company can be profitable but not have cash in hand to pay their creditors. The question is, How is the company faring in cash terms? It may be earning a profit, but if there is not enough cash to cover short-term liabilities, those payments can be negotiated too.
Most Business Debts Can Be Negotiated
Contrary to popular belief, most business debts can be negotiated, at least as to their terms. That includes secured debt like mortgages, real estate loans, equipment loans and leases, along with unsecured debt like credit cards. It also includes payroll, taxes and past-due bills such as rent and utilities.
Why should a creditor agree to lower the amount owed on a debt, or grant additional time to pay? After all, your business is still alive and can work to repay the debt in full. What kind of incentive does the creditor have?
To get a creditor to agree to any kind of concession, you need to understand what’s at stake for him or her. Think of it as carrots and sticks. The carrot is what they get if they work with you. That can be payments, security or a guarantee. The stick is what the creditor loses by not working with you. That can mean the threat of non-payment, a bankruptcy filing or a lawsuit. A profitable business that is still paying has carrots to offer.
It also helps to know that creditors are often flexible on some terms even when they are firm on others. A lender may refuse to touch the total amount owed and still be willing to reduce the interest rate or allow extra time. Maybe payments can be spread out over a longer period of time and made in the same total amount, to give you breathing room. Other creditors will go further and offer a discount on the principal if you pay immediately, or commit to paying it back at an accelerated rate. There are different degrees of collaboration, and it’s not easy to know ahead of time what a creditor will tolerate. Negotiations tend to be very case-specific, just like the lenders. Before you go into negotiation, you need to understand your own situation. If your business is profitable and can meet obligations, your goal in negotiation is to improve cash flow, not sacrifice the ability to pay.
The Paperwork
The place to start is the paperwork you already signed. How much are you obligated to pay? What collateral or personal guarantees are locked into the terms? What happens if you default? Look for when, and under what conditions, you are allowed to adjust or terminate the arrangement. How much freedom do you have in altering payment schedules or amounts? Can you pause or stop payments? In other words, know your lender’s rights as well as your own. The more flexible or vague a clause is, the more valuable it is during negotiations. Changes in market conditions, economic climate, interest rates and other factors may allow you to renegotiate the agreement based on changed circumstances. If there is any wiggle room, that is what you are looking for. You may have already considered these things, but they are important to understand before you start talking with your creditors.
Then there is the question of who does the talking. Some owners call their creditors themselves. Others prefer to keep their hands off so they can continue to run their companies and produce revenue. Still others will hire a third party, called a negotiator, to act as an intermediary and settle the case for them. At Delancey Street, our senior advisors negotiate with funders and lenders for less than the full balance owed; we do not sell you another loan. If someone else is making the calls, you still need to know the details of your case.
What Happens if the Talks Fail
Both sides also keep one eye on what happens if the talks fail. If you and your lender can’t reach an agreement, what will the consequences be? It’s good to come to the table with the creditor’s fallback position in mind, and anticipate how you will proceed from there. The first alternative is litigation. A business owner can wait for the creditor to sue, or file suit first. A lawsuit is expensive, time consuming and can turn ugly. That cuts both ways. Because a case drags on and costs money, the creditor has a reason to come to the table. But there’s a bad outcome if you lose. If the court finds against the business owner, they can be ordered to pay the total amount owed, plus interest. Depending on the agreement, they could also have to pay the creditor’s attorney fees.
The second alternative is bankruptcy. For a business that may be healthy in the long run but is going through a temporary hardship, that often means Chapter 11. Filing Chapter 11 puts a temporary hold on your creditors’ ability to collect from you, while you have a chance to bring your house in order. Under a plan that has to be approved by the court and by the creditors, a business can work to pay off its debts with less money, over a longer period of time. For a lot of creditors, bankruptcy is a real threat, because it means they lose the ability to collect immediately. Creditors that refused to budge before a filing may be willing to negotiate after a business files for bankruptcy, particularly when they see the court giving the business a reasonable chance to reorganize. Neither lawsuit nor bankruptcy is a painless prospect for either side. We are not a law firm, so when bankruptcy is the better path we refer owners to a vetted independent attorney, such as bankruptcy counsel for a Subchapter V case.
Some owners ask whether they can simply close the business, or dissolve the corporation, and let the debt go away with it. In most cases it does not work that way. Think about what happens after you close your doors, and how much of your personal money or assets would be at stake if the business failed. Do you have personal guarantees? If so, you are at risk. If the debt was secured by business or personal assets, those assets are at risk. And certain taxes, like sales and payroll taxes, can fall on the owners personally.
So, can you settle business debt while your business is still profitable? Often, yes. The bottom line is that creditors do work with borrowers, and well-informed business owners have some bargaining power. Just because a business is profitable, it does not mean that the cash flows are strong and can cover short-term obligations. But even if your cash flows are not high enough, your payments may still be negotiable. To have a good chance of success, though, you first need to do your homework. Know the cards that each side can play. A first consultation with Delancey Street is free and confidential, and if a cheaper option exists, we will tell you on the first call.
