Expert Business Source

By Rob O’Regan

Heavy debt can sink a small business quickly. One option for business owners unable to dig out on their own but unwilling to declare bankruptcy or liquidate their business is a third-party debt-negotiation service.

How do you know when you are in too deep to help yourself? Charles Doyle, managing director at Business Capital, a San Francisco-based firm that provides debt-restructuring and negotiation services, offers these red flags:

• When you start running in the 90-day past due column with creditors.
• When you have to turn to high-interest loans to fund the business.
• When you’re running up credit card debt.
• When you start borrowing from friends and family.
• When you stop paying payroll taxes.
• When you start laying off staff.

“Most people [in these situations] are honorable people, and they try everything possible, but they just can’t service their debt,” says Doyle.

Doyle argues that declaring bankruptcy to keep the creditors at bay is almost never a good idea. “Chapter 11 is very expensive,” he says, “and most Chapter 11s end up in Chapter 7  liquidation where most of the money goes to pay the legal fees.”

Debt negotiation, on the other hand, gives businesses a chance to work out their debts while they continue to do business. Debt negotiation is just what it sounds like: Firms such as Business Capital negotiate with creditors on behalf of the business to come up with a repayment plan that both sides can agree to.

Doyle stressed that every situation is different, but outlined three important steps of any debt negotiation.

• Monetize on the assets.
  “Can we get a loan, an accounts receivable line of credit, or a sale and lease-back of the business’s assets? If it’s retail, can we get a loan based on credit card receivables?” That credit can be used to pay down delinquent debt.
• Talk to all the creditors.
  Match what the creditors believe is owed to them vs. what the client can pay.
• Prioritize the creditors.
  A senior secured creditor that has a lien on business assets is in the catbird seat and therefore becomes the top priority. “The last thing [the creditor] wants to do is foreclose on a company,” says Doyle. “We talk to them about an amicable solution to keep [the debtor] in business.” Next on the priority list are companies that have secured leases on equipment, computers, etc., followed by unsecured creditors – suppliers, vendors, credit card companies and the like. “With those [unsecured] creditors, typically we will be able to make some type of arrangement such as a permanent reduction or a payment moratorium.”

The Federal Trade Commission sounds a cautionary note on debt negotiation, warning business owners about companies that claim they can pay off unsecured debt at anywhere from 10 to 50 percent of the balance owed. Business owners should also be wary of companies that claim they can wipe the slate clean on your credit report. With debt negotiation, there are no guarantees that creditors will accept anything less than full payment.

The FTC recommends that companies considering a debt-negotiation service do a background check on the company using three sources:

• The state Attorney General.
• A local consumer protection agency.
• The Better Business Bureau.

Doyle concurs. “The first thing is to check out the company’s Better Business Bureau record,” he says. “The business should also have references are checkable and viable.” Membership in a professional organization such as the Turnaround Management Association also lends credibility, he adds.

The right partnership with a financial advisor can provide some breathing room and allow you to concentrate on your business instead of your debt. Says Doyle: “When you’re at such a critical juncture, the management team really needs to focus on business activities, not the creditors. We can focus on improving the financial situation, and the management team can focus on improving revenue.”

Rob O’Regan is a freelance writer based in Londonderry, N.H.