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62 Bankruptcy for Small Business
What will often follow is a dance where your lawyer tries to secure breathing room and a continued flow of supplies for you. The business creditor, on the other hand, will try to secure a more protected posi tion should your business fail and have to file bankruptcy.
COD
A common early step is to place your business on cash on delivery (COD). You receive your products and the seller is sure to receive money for goods paid for right when he or she delivers them. This puts you in a tight position, but a surprising number of small businesses can live with this procedure. Furthermore, it at least allows them to continue to operate while they address their outstanding debts. This COD solution is such a reflexive step by the creditor that it is often an early warning sign that your financial problems are getting out of hand.
Many times a business cannot survive if it is placed on COD. Its lead time between goods received and service on products sold is too long. The business needs continued credit to continue to operate.
Liens
Sellers who know you are in trouble—and who may even have col lectibles from you that are not being paid—are understandably reluc tant to give you more credit. Your only hope is to offer the seller an improved position in the event you file bankruptcy. What you can offer will depend on your business and what you have already given other creditors. A possible item is a lien on your accounts receivable, business equipment, or inventory. This type of action is a fine line for most small businesses to walk. Often they will not have inventory to offer, and equipment may already have a lien on it. Often the creditor does not want to risk taking an interest in your collectibles or equip ment because it is not really set up to dispose of them.
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Advantages and Possibilities of the Workout
Another possible advantage of a workout guided by a lawyer or other third party is to simply get your creditors off your back. Receiving demanding phone calls from creditors saps your time and energy. Dealing with them takes time away from what you could spend on saving the business. Quite often a phone conversation with a third party who can unemotionally explain the consequences of your busi- ness failing to everyone will cause business creditors to back off. They must get something, but if a reasonable case can be made that a little time will allow the business to survive, they may stop the calls and lawsuits.
For a workout to be accepted, you must have a brighter future. A job in the process of being done, a customer almost landed, and an improved economic prospect are all examples of what to present. Entrepreneurs by nature are opti- mistic. The first person you should try to convince is the lawyer you visit. He or she will tell you whether or not your plan or prospects make sense. Since the business is not your attorney’s business, he or she can be more objective about its prospects. While lawyers try to be objective, they do not know as much about your business and your industry as you do, so you may be tempted to bluff on the truth with them. You are paying your lawyer good money for his or her advice and time, so try to be as honest and objective as you can in telling him or her the facts of your situation.
Sometimes the mere mention of bankruptcy will be enough to make the credi- tors back off a bit and offer compromises. Sometimes it is the mention of bank- ruptcy by a lawyer that will do it. Other times nothing will stop the creditors and a workout is impossible. You cannot know until you start the process. If a workout is impossible then you will need to consider what will happen if you file bankruptcy.
The small business owner should be thinking about what he or she will do if a business downturn continues too long. In financial affairs, the ultimate retreat is bankruptcy. You want to fight as hard as you can to keep your business and personal finances going, but do so in a way that will leave you an exit strategy if that ultimately becomes necessary.
There are a number of classic mistakes people make when they are facing financial problems—mistakes that make it very hard to salvage their assets when they must consider bankruptcy. Some of the mis takes to avoid are:
• borrowing against a pension plan;
• borrowing against a home to pay off credit cards;
• borrowing from family members and giving a vehicle or home as security;
• taking cash advances on a credit card;
• living off of credit cards;
• transferring balances from one card to another;
t en t raps and m istakes to a void w Hen y oU H ave m oney
p roBlems 9
• lying or exaggerating on loan applications;
• not paying income taxes;
• stopping payment of withholding; or,
• not following corporate formalities.