Borrowing to pay debt…don’t
It is a huge temptation and frequently done, very frequently, and while it feels good and may feel like the right thing to do and that you are solving a problem and thus its a form of success, I challenge the decision, do not use debt to pay off debt.
First, borrowing to pay debt without further analysis and a very compelling reason, like a deep discount is a mistake. You have not improved your position one drop as one debt is not very different then another debt, especially if you are not performing on the debt service.
You may have made one lender or creditor very happy, but I propose this is not your job or your objective. In fact it could end up being very counter productive to your overall mission and goals.
The major reason for being in arrears with your creditors is lack of liquidity. Not enough gross revenue or profitability to satisfy your overhead, operations and debt service requirements. Thus you juggle all three and generally make little progress and will likely hurt all three areas, failing to handle operations and development adequately and defaulting on various debt obligations.
If by some small miracle you manage to arrange for a loan, putting the cash back into debt reduction fails to accomplish anything meaningful for you. It may make one obligation smaller and more secure but this did not change your illiquidity and now you have another debt to repay.
I suggest that if you can arrange a loan the only appropriate thing to do with it is create more revenue by investing the cash in marketing, sales or production, the only three ways you can increase revenue and profitability. Service debt out of increased liquidity and profit, your cash. This works.
In fact I would explain to your creditors, at least those that are secured and have rights to your collateral that this is your plan, to improve the business so you can pay the notes out of revenue not borrowed funds.
Second thought, lets presume one of two situations develop, either you borrow and manage to develop additional revenues or you fail and do not create additional revenues or profitability, thus leaving you right were you were only with an additional loan and more debt service.
This strategy also puts you in an excellent position to negotiate workouts lessening the debts and restructuring the pay back. If you fail to create additional revenues you are in a better position to negotiate workouts and if you succeed there is still an opportunity to accomplish the same goals as now you can sprinkle some cash over the debt.
If necessary this may also lead to asset sales and re-organization (NOT bankruptcy which is most always unnecessary, too expensive and usually fails to protect the business in the end), in which reduced payment, reduced debt may be further negotiated or totally eliminated.
Had you used the cash to pay the lender there would be little incentive for them to support you with greater leniency and a workout, why should they, you just paid them.
Thus in either situation, you either get to use the valuable cash to grow and develop so you can pay your debts out of revenues and profit, as you should, or you are far better positioned to negotiate workouts with the lender or creditor as you have little to offer and they are best served supporting you with concessions so you may live for them to collect another day.
This would apply to banks, IRS, and other secured creditors and most definitely to unsecured creditors were an additional reason to not use borrowed funds to pay them back is the reality that if you are paying anyone it should be the secured lenders as they have direct access to your assets.
Use your cash to develop your earning not pay debt and if jammed negotiate workouts paying only a percentage on the dollar and scheduling payments over time without interest, instead of paying them back out of borrowed funds just to make them happy.
No matter what the temptation and all the good reasons, do not borrow to pay debt if you can possibly help it. Its the wrong strategy to follow. Call for help 413-549-2966.
