Unsecured Vendor Debt… Be Gone!

Some of our clients suffer from being unable to pay large unsecured vendor debt. Typically, one gets behind on payments while on credit terms and while buying and paying current invoices, old invoices get older. Eventually, new orders must be paid for COD (Cash on Delivery) or even in advance while a portion of the old debt is added onto the new invoice to slowly whittle it away. It’s a never-ending battle that eventually leads to one being shut off altogether, owing too much to recover from and having wasted all the partial payments made on new invoices for old debt. It’s a clear indication of operating below the break-even point and losing ground every day—a clear indication that a workout is required.

In our strategy, while reorganizing the company (not filing bankruptcy) we have the opportunity to remove ALL the unsecured debt, subordinate to the unpaid secured debt. We all know the rules of the game. Until the secured debt gets paid off in full, unsecured debt must go unpaid. The money is first owed to the higher secured party—the bank—until they are paid in full, then any remainder available can go to the unsecured.

By electing to be unsecured, the vendor has no way of collecting. It is the riskiest form of business but was the choice of the vendor and he accepted this risk and lost. Most of our clients, when we describe this reality, exclaim that they need a particular vendor, that they cannot live without a particular supplier, and “we know him so well and he helped us by extending credit,” etc. Thus, they want to pay their most valued vendor so they can continue to buy from him. An emotional response, while understandable, is just emotional. The reality is that virtually every vendor will do business with the newly reorganized business without issue in regard to the old debt. The reality is that everyone in business understands the risk and the consequences of dealing unsecured. When a client goes out of business it is disappointing but not unexpected or shocking and every supplier wants to do business with the new entity. No one wants to lose out.

In short, if a reorganization is handled properly and presented professionally, old vendors that did not get paid what was owed will do business with the new entity. Besides, you can always elect to pay a vendor if you believe it is that important.

This is what works. Call us for help if you need it. Norm will arrange no-obligation teleconference for us to discuss your options. 413-584-2581.