When your business can’t keep up with what it owes, the instinct is often to go quiet. Some business owners are nervous about calling for more time. They worry that it makes them look bad, that their lender or supplier will be furious. But think about it: a missed payment or two makes you look far worse than asking for more time. Whether the debt is a loan or a large purchase, you can often get better terms by working out a creative solution with the creditor, and there is no reason to be afraid to ask for a more flexible schedule or for partial payments. Here is how to go about it.
Start early. Call your creditors as soon as you know there is trouble. The minute you are late they are thinking of you as a risk and they start to plan for the worst. Falling behind lets the debt snowball, and it hurts your business credit score, which means higher rates on any loans you apply for in the future. A missed payment can stay on your credit report for seven years. As soon as you sense a cash flow problem, pick up the phone. Say, “We’re having a tough time but we want to make it work. Can we talk about a payment plan?” You call before you miss a payment, and they will be much more willing to help you work out a solution.
Call them before they get passed to a collection agency. Dealing with professional collectors is a lot more unpleasant than talking to your original creditor, and is far more harmful to your credit history and scores. Your creditors would rather avoid that outcome too: once a debt is passed off to a collector, the creditor loses the ability to collect much of what is owed, so it is in their interest to work with you.
Run the numbers on what you can afford to pay. Before you call your creditor, figure out how much you can afford to pay, for how long. What is your cash flow like? How much are you unable to pay? For how long? Get a sheet of paper and lay out the situation clearly. Look at your income, your expenses and your assets. If you don’t have these numbers, you’re going to be talking blind. You’ll never be able to argue your case effectively if you can’t answer the simple questions.
Then decide what kind of deal you want. The stronger card to play, if you can, is a lump sum payment now. If you can arrange a lump sum, you should have a better chance of getting some significant concessions, such as a lower total payment. Paying a debt for less than you owe can hurt your credit rating (but it might be the best way to deal with your situation). This can have serious consequences on your ability to borrow money. If you can work out monthly payments that you can comfortably manage, it might be better to invest the lump sum in your business. If you do go with a payment plan, get in writing the total amount you will have paid before the debt is settled, so that you can calculate the APR you will be paying. How much are you saving with the reduced payment versus the total cost over time?
Approach the discussion with a friendly tone. When you ask for new terms, you’re just asking the person for a courtesy, and nobody does a favor for someone who is rude or demanding. So start by being nice. In fact, be very nice. Don’t let emotions get in the way. Avoid getting angry or defensive. These emotions won’t help you pay down debt faster. Try to stay calm as you present your case for creditors. Even when creditors get emotional with you, stay cool. If you feel yourself losing your composure and can’t get it back, excuse yourself from the call. Call back when you’re calm. You will make a better case, and better decisions.
Tell the truth. Be upfront with your creditors about where your business is, what cash flow is like, and what is causing your inability to pay right now, whether that is a shutdown, an unexpected expense or a drop in income. Creditors do not want to hear “business is bad, I don’t know what’s going on.” But they want to know what you are doing to make it right. That could mean cutting expenses, diversifying how the business makes money, applying for government support or consolidating debt. No one wants to see your poor life story, but when you tell them what went wrong, you’ll have to offer some corrective actions too. Keep it specific and brief. Too many backstories confuse people. You don’t want the creditor to think you are simply trying to dodge the full amount without good reason. Honesty and initiative go a long way with creditors: if you acknowledge the debt, have a plan, and are clear about it, you can move toward a resolution. When you are on the same team, a deal that works for both sides is much easier to reach.
Ask questions, and write down the answers. Jot down a question you have before the phone call or meeting, and write the answer down as well. Don’t rely on your memory. Each time you speak with someone, note the date and time along with who you spoke with, what you discussed and who promised to do what.
If they say they’ll sue you, garnish your assets or take your property, don’t freak out. Those threats might not be legal, depending on the situation. Instead of panicking, ask questions and write down as many details as possible, then you can investigate later to see if they’re allowed to do that. Picking fights with creditors and arguing with them over the phone usually makes things worse. This is a negotiation, not a firefight. Asking questions keeps you from getting emotional, and it keeps you from saying something in anger that you will regret.
If negotiating on your own isn’t getting you anywhere, or you have several accounts that could fall behind at once, look at consolidating your debt. A 0% balance transfer credit card would be the best option if you can qualify for one, since you’d have more time to pay the debt off without a burden of interest. Or, you could get a business loan from a different creditor and pay the debt off all at once; look for a consolidation loan with a low interest rate. If you don’t qualify for either, consider a credit counselor. You pay the counselor one monthly sum, and they distribute the money to your creditors. If you go this route, make sure the credit counseling agency is certified. That will help you avoid a scam or a predatory lender.
Whatever your reason for wanting better terms, go into these conversations as a resourceful problem solver: cooperative, optimistic and prepared. You are not a ‘bad’ person if you cannot pay bills. You’re just a business that’s out of cash. While you might think this is all a lot of effort just to get yourself a few months’ breathing room, the truth is it can save you and your business in the long run.
