The First Rules For Debt Workouts

I understand your situation. You owe everyone imaginable as your cash flow is inadequate to support your payable requirements. Over time the debt grows as you simply do not have adequate cash flow or profit to invest in growth and development as well as pay old payables as you try to work your way out of this predicament. You juggle the cash to pay just enough to keep your creditors mildly unhappy but still talking with you and thus you keep the ship floating, although very little real progress is being made in reversing your negative cash flow or resolving your debt.

Here is my first rule for you to follow: Please be aware that you are headed for and will require a workout which is a debt resolution negotiation. This could take on many different forms including litigation, bankruptcy, closing your doors, or negotiating workouts. In the end, the unsecured creditors will be paid very little as the secured debtors will receive the most if not all that is available. In fact, depending upon how you handle the workout, the unsecured creditors could also be wiped out by then looking to guarantors or simply writing off the debt as noncollectable.

Your strategy is to grow your way out of this dilemma but the problem is the money you throw at old debt does nothing to improve your business, it merely absorbs critical cash and still does not solve any problems as it is never enough to change your payable status. But because you know you owe the money, because you are trying to do the right thing, because you have great integrity and honor, and because you are unaware of how a workout unfolds, you throw critical cash at creditors–even unsecured ones–to placate them and attempt to pay them down. You think that somehow this is the right thing to do and it is also good for you in the long run, as eventually you will pay off the debt.

Here is a dose of reality and rule one: Stop paying any unsecured debt at all. Zero, nothing other than critical survival requirements such as telephone and electricity bills. Your cash is far too important to your operation to squander it on unsecured trade debt. The same applies to secured debt, although they have far more power and priority. It takes a very long time for them to actually do something about it and thus any allocation of cash in a critical time to them is also an ineffective decision.

Remember, you can always pay, but once paid the money is gone it cannot be used to generate income, a far more important use. Can you live without your creditor trade vendors? Absolutely. There are always others–maybe not as good, maybe better. There is always someone to fill the gap and provide the service. The only time you may want to reconsider this position is when they are offering you or you are negotiating with them, or a third-party workout guy is negotiating with them to take ten cents on the dollar. This may be a valuable opportunity and worth allocating the cash.

Secondly, not paying sets the stage for a workout. If you are paying, why would they take less on the dollar? You’re paying! If you are not paying them, then a workout may make quite a bit of sense. The point is that any divergence of cash from income-producing activity is not in your best interest. Stop paying on your credit cards and other nonessential survival debts and start looking for a workout resolution. Focus your cash on income-producing activity and you will do the most for your turnaround and your workout. All too frequently, I see precious capital squandered on old debt which does very little to advance the cause of an upside down business situation.