Why You Must Be in Default to Do a Workout

Every day, I speak to small business owners all over the country. I hear the same issues every day. No one ever wants to go into default. Every business owner I speak with fights tooth and nail to pay their loans and other bills. Small business owners take pride in honoring their commitments and their word, as they should.

Unfortunately, reality has a way of controlling our desires, and in this case, reality wins. You must be in default to enter into a workout. Why would a bank or creditor of any type be willing to enter into a workout negotiation if you are current?

Despite how much sacrifice you are enduring, and the problems you are experiencing, if you’re current there is little incentive for a creditor or lender to adjust the obligations. After all, you are current so why should they? Thus the obvious answer is that default is critical to put the workout ball into play from a practical point of view. However, and this is the real show stopper here, the reality is in fact the rule for entering into a workout with a bank and especially any loan guaranteed by the SBA; loan default is fundamentally required before a workout discussion can occur. That’s the rule.

So, the first lesson of the day is to swallow your pride, remove your ego-driven attitude and buckle up for reality. If your revenues are down and you can no longer afford to service your debt, and you must enter into a workout negotiation to survive, you need to cease making the impossible debt service payments you are struggling to keep current and default on your payment so a workout can be engineered.

It is reality, it is the rule. It has little to do with your personal success or failure, or your word, or your commitments. It is the only way to succeed; you have no choice. Thus leave your commitments and your ego at the door, follow the rules and understand the requirements. You must be in payment default to enter into a workout negotiation and experience debt forgiveness, the only path to success in this recession.