Entering default without a plan?

Entering into default on your secured business loan is similar to entering into enemy territory.  Without a plan and back up, you will never get out alive, you are doomed to see a difficult end with many casualties.  In the small business world that equates to the demise of your business, loss of jobs for all of the employees, and the guarantor’s personal assets being attacked by the secured creditors.  The end result is often bankruptcy where all parties experience minimal returns.

We see this repeatedly.  Often the small business owner will enter into default holding on the the hopes that the economy will rebound, revenues will rapidly increase, and the problem will fix itself… I like to call this the ‘kick the can down the road’ strategy… The end result is always the same.  Revenues do not increase, the economy does not rebound, and the bank is forced to shut down and liquidate the business.  This leaves the majority of the debt on the shoulders of the small business owner who has lost everything and results in little to no return for the business assets or the personal guaranty.

Recently we engaged with a client who had ignored the bank for over 5 months, hoping for the best.  By the time he engaged with us his business was closed, he had no cash, and no plan to recover from his secured bank note, landlord obligation, leases, and unsecured creditors… Truly unfortunate.  Even if the business was not viable given the amount of debt, a proactive strategy that included the bank, would have yielded a much higher return for the assets of the business.  An orderly wind down is always better than a vacant business with only a few remaining assets.

Now the guarantor has come to his senses and has a plan.  He does not want to file bankruptcy.  He no longer wants to run from his creditors.  We will help him settle his debts with his few remaining assets… Had he only applied the same logic and level-headed thinking to his failing business, we could have saved it.

If you are in default, understand the position you are in.  Even if you truly believe that you are about to experience growth, you must have a plan in place in the event that you are wrong.  Understand that your banker has regulations he must follow.  He can only allow you to be in default for a very short period of time, usually 45-90 days.  After that, THE BANK WILL SHUT YOU DOWN.  Be proactive, explore your options.  YOU NEED A PLAN