The Art Of ‘The Workout’: A Practical Guide To Working With Your Business Creditors

November 22, 2014

We’ve all been there at one time or another- a bounced check, late loan payment, overdue utility bill. Although most of us strive to keep our financial houses in order, this is not always possible. If these incidents are isolated and uncommon, then a resolve to keep better track of things is usually all the remedy that is necessary. However, if they are becoming commonplace then it is considered critical and should be dealt with at once. Usually though, instead of being promptly addressed, the situation is ignored -leading to bankruptcy, foreclosure, litigation, negative credit reporting or even forcing a close of the business.

Businesspersons tend to ignore financial problems for one of three reasons: 1) Denial: they cannot see the big picture that things are taking a downturn so they proceed to as usual , 2) Hopeful: they have great expectations for that big deal, sale or buyer that will come and save the day, so they try to hold on until then, 3) Hopeless: recognizing that the situation is bad but believe that nothing can be done to reverse it. Whichever the reason, the situation often reaches the point when it is impossible be salvaged without huge infusions of cash to payoff the debts plus exorbitant interest, late fees, litigation fees etc.

Unfortunately, while there is no easy answer or quick fix, there are basic steps that can be taken to avoid these extreme consequences and improve the chances for recovering business financial health. Their goal is to provide more TIME: the most common denominator and success factor in turning things around.

During my tenure as in-house counsel with the commercial loan department of First National State Bank-Edison (now Wachovia) and during over twenty years practicing law in the business arena, I have learned a few things about the work-out and gaining time. The keys are: KNOWLEDGE, COMMUNICATION, and use of EXPERTS.


Know your situation. The earlier you recognize the symptoms, the better. A thorough, realistic, assessment of income, cash flow and receivables is essential. Are there enough factors you can control and reduce, such as salaries, number of employees, location, etc. to equal or outweigh losses from things beyond your control such as fixed expenses, state of the economy or quotas? Will more time help, or will it just prolong the inevitable? Economizing, cutting expenses and eliminating unnecessary expenditures is always crucial and helps show creditors that you are serious. Perhaps you can use appreciated assets to borrow funds, or put out feelers to take in a partner or co-signers, – all easier to do while your business is still viable.

Know your adversary. Is it a factor or a bank? A landlord or mortgage company? Suppliers or Utilities? All of the above? Answers to questions about your past credit history, type of collateral held, state of your industry, etc. will help you determine how strong of a bargaining position you have and discover what makes you a valuable customer. Creditors are businesses just like yours, and they would much rather have an account in payback, then charged off or in collection. Collection costs money and present dollars are more valuable then the promise of future ones. Tip: banks are more motivated to make settlements in the fourth quarter because they want to avoid government auditors picking up charge offs in the next fiscal year. And for the same reason the larger the debt the easier the negotiation.

Know the system. Not every account history is reported to a credit bureau. Typically, credit lines, mortgages, car leases and credit cards are reportable items, while rent and utility payments are not. Use this information to prioritize and plan out your payments. Be very aware of each creditor’s late payment and reporting policy. For example, do they report after 30 days, or 60 days? Will they immediately credit, telephone or on-line payments?

Develop the habit of reviewing your business and personal credit reports at least annually and fixing mistakes immediately. Keep accurate records of payments and copies of all satisfaction letters and cancelled note and checks to use as proof an account is paid off. An often overlooked but revealing report is a lien search done on your home and business real estate by a licensed title company. On-line searches are not as accurate. These will show default judgments and tax liens that often are missed by the credit report.


The largest mistake a debtor can do is to ignore the creditor. Cultivating a relationship with as many of their representatives is the single most important tool in the work-out. If you have been relationship building with your creditors this base of trust and accountability can help you in a downturn. Their reps have a wide range of discretion to make payment arrangements, waive late charges, and change billing due dates. They may be able to implement an in-house refinance, interest only payments, or a limited moratorium. Asking lots of questions will reveal valuable information about your options. Take notes of their names and contact information and get written confirmation (fax, mail or e-mail) of any agreements.


Another mistake is waiting until the last minute when you have received notices of collection, foreclosure or any lawsuit. The truth is that having an attorney review your case early on can make the difference between success and failure. For example, the attorney will review your loan documents, notices, summons’ etc, to see if the creditor has committed any violations and to make sure return dates and deadlines are observed. You will learn what your legal options are, and what they will cost so that you can make informed decisions instead of being under pressure. Accountants and other financial professionals might also need to be brought in. Don’t be afraid of spending some money now, instead much, much more later. If you have followed the Knowledge and Communication steps, the Experts will have more tools to negotiate with on your behalf.

Utilizing these steps can buy you valuable time, enable you to explore and implement your options and help you to negotiate from the strongest possible position. You will switch from being a victim of circumstance to someone who is taking positive action towards regaining business financial health.


Categorised in: Debt Law