Let's Talk Business Blog

Many small business owners borrow money from their family to support a business endeavor. It is natural and occurs all the time. Unfortunately, because it is family, it tends to be loose, less formal transaction than if money is borrowed in the normal course of business, and loans of this type rarely carry a note or UCC filing, or even a written agreement.

It makes little sense to treat your family in such a shoddy manner as you are really sacrificing their protection if you ever get into financial trouble, and this happens every day. Most family lenders say, “I can trust so-and-so… I do not need a note or a UCC filing. My relative will pay me back.” It is not about trust between family members, it is about priority and payback, and protecting yourself and your family in a default situation.

Additionally, it is entirely possible (and even likely) that money may be borrowed from your family even before the bank lends. Thus, the family loan is on file in front of the bank’s, assuring your family priority in the case of default, which can be very helpful to the borrower for many reasons.

An astute banker or bank lawyer may require you to subordinate a family loan to a bank loan, thus removing the family from first position to collect. Though diluted, significant power remains if the loan is documented and publicly filed (and thus considered a legitimate obligation which must be respected and dealt with) and this can play an important role in the workout scenario. The bias of the lenders, bank and SBA is that a loan from a family member need not be respected or repaid, and can be ignored and rolled over for the benefit of the bank. Proper filing prevents such a cavalier attitude.

This is exactly what will happen unless the loan is documented, collateralize and publicly filed. This does not mean your family member will hard collect, or foreclose (or even collect at all), but it does create a barrier between the bank and your assets that may be very beneficial to your workout and survival, as well as making certain your relative’s money does get returned to them if possible.

The point being, if your parents’ loan for your new start-up is handled impeccably from the start, in default that will serve valid purpose as the terms are enforceable and thus it must be respected and dealt with. If not defined properly, it will be ignored, and not only will a loss occur, but you will have lost the protective benefit of such a filing.

Revenues are down, the economy is terrible. What to do…?  You must force revenue.

What does this mean? The answer comes in many styles and shapes, and depends heavily on the type of business you have. The important message here, however, is that lost revenue is what is tanking you and despite the awful environment, the terrible economy, widespread unemployment, no borrowing power, decline of credit card availability (and on the list goes) you must force revenues to increase, or die trying.

But how does one force revenue? Many ways:

1. Add sales people. Yes, it costs much, but utilize a top-heavy incentive plan, rewarding sales with large commissions and low base draw, churning the lust for earnings in your sales force. Reward sales people at a level above normal and reap the benefits. Many small business owners reduce their sales force and lower commissions—not the way to go.

2. Find different vertical ways to expand: internet, retail, wholesale, manufacture, import. Reinvent yourself. Force profits, force revenues.

3. Finance your sales and take risks. It may be worth it in the long run.

4. Joint venture: Lower cost, higher return.

5. Horizontal expansion. Add more locations.

6. Buy your competitors.

7. Specialize. Be an expert.

8. Expand public relations efforts, including press releases.

9. Use the internet more effectively, e.g. use social networking.

10. Go virtual. Lose the office and factory overhead and have sales reps work out of their own homes or offices.

11. Give seminars, engage in public speaking or presentations of any sort.

12. Do charitable work.

The list is endless but the point is clear: Force revenue. Figure out how to do this for your business and then do it. Remaining passive is the death knell. Force revenues.

Why pay your debt when you will end up doing the loan workout eventually? Consider the following… You all know how bad things really are for you and your business. Revenues are way down and overhead continues to creep upwards despite your attempts to reduce payroll. Realistically, things are quite grim. You may have already stopped taking a paycheck, as if that will save the day. Why not do the loan workout now and save your cash?

You may, however, be perfecting the age-old art of avoidance, not recognizing the clear reality that you are losing money and there will be a point in time that you will cease to be able to operate. Then what? You know when you are at that point. Why not consider a loan workout?

For most of you that point is now. Few will act, and those that do not stop and reconsider their plan are truly wasting valuable life-preserving money—money currently being spent on a note that will soon be in default. So, what’s the point? In fact, maybe the debt service money you are about to spend this month and for the next few, if invested in your turnaround or loan workout, would yield a far greater return. It may, in fact, save your business life.

If it is true that at some point you will default and be forced to do some sort of loan workout—or leave the bank with its loss—why spend one more dollar on one more payment? If you’re going to default, default now while you remain in control. Default now, while you still have the life force to reform, do a loan workout and redirect your business energies.

You may be throwing away valuable revenue if you are paying the bank when you know you will ultimately default. It makes no sense. Paying the bank one more payment to “keep things going” instead of doing the loan workout, is a waste of the money. Hoping things will change and that you will be able to continue to pay the notes? Another waste of the precious funds.

The only thing that can, and must, change is you and how you handle this long-term downturn. Stop making payments on debt you can no longer afford and that you will eventually default on. Stop wasting precious capital when you could use it on your own business loan workout or turnaround.

You are throwing away valuable revenue; use it on yourself, do the loan workout. This is called survival. Call us for help and direction and we’ll help you do the loan workout. Norm will set up a no-obligation teleconference. Call 413-584-2581.

A loan workout is always a unique experience.

Every loan workout is different.

Every loan workout requires a focused, specific strategy to handle the unique aspects of the particular fact pattern that the situation requires.

Every loan workout has its own twists, its own issues and its own demands.

• It may be a particularly tough landlord who will sue on the defaulted personal guaranty and not negotiate.
• It may be a tough second or third lien holder who refuses to accept zero, despite the appropriateness, and holds up a transfer or sale or a conclusion of some sort.
• It may be a difficult lessor of equipment not willing to accept our offer.
• Maybe it is a spouse unwilling to accept the proposed strategy.
• It could be the issue of a large and valuable—but difficult to collect—accounts receivable aging.
• It could be large inventory or expensive collateral not worth much even at auction.
• It could be co-guarantors with collateral and net worth.
• Maybe it is a home with no mortgage, thus not upside down at all.
• Maybe it is a partner who does not want to do a loan workout.
• It could be license issues, contracts in process that cannot be assigned or minority-owned status that is important to maintain.
• Maybe it’s cross-collateralization by other profitable business entities owned by borrower.

The list of unique possibilities and unusual issues goes on and on and on. Every loan workout is unique. The strategy may be similar but the unique facts of each situation requires a fresh review and a creative application of our skills to successfully protect and support a successful workout. The important point to understand is that we recognize this fact and do not employ a “one strategy fits all” approach. Quite the opposite is true. Every loan workout is unique and requires an adapted strategy designed to handle the specific issues of each unique workout situation. Never are two the same. Never are two inclusive of the same challenges. Every loan workout must be designed for the specific problems encountered in the workout being addressed.

Yes, there is always “hair” on every workout, i.e., unique facts that make each workout special. We know this, and thus it is exactly how we approach every unique situation, giving it what it needs. This is one reason why we are so successful at what we do. We treat every loan workout uniquely, specifically and with great respect for its nuances and differences.

I have hired a professional contractor to convert a porch into a three-season sun-room. It is not a big project, but certainly a project that is expensive, time-consuming and deserving of close attention, as it is an example for the many contractors working on a fixed-price contract. What was projected to be a “three-week project” is now a nine-week project, and it is not over yet. The price is still the same, but the time allocated extends to three-times the time projected. My guess is that the contractor is still thinking he has made profit on the project, but the sad truth is, not only has he not made money, he has probably generated a loss and does not even know it yet… not a clue.

Here is the problem: Overhead.

It is not just payroll—although that is also a huge factor and likely filled with waste from the time extension—but I will assume his employees worked the prescribed number of hours he computed it would take, and that it just took a few extra weeks to organize and complete. Downtime results from subcontractors not showing up when they said they would, and taking longer than they thought they would waiting for materials to arrive, weather issues, sick days, personal days, whatever days… it simply took too many extra weeks.

Here is the point: Every single day costs money. All the fixed costs, insurance, note payments, utilities, staff, everything the small business owner must pay for—whether or not he is earning—equal a daily overhead burden. This job absorbed at least six extra weeks of overhead burden, probably not computed into the cost of the job as it was only scheduled for three weeks, not the nine it has taken thus far. Not to mention the lost opportunity and the cost of time unable to be used for generating additional profit (now lost irrevocably). But who is counting? Not most small business owners!

That extra one month and two weeks of overhead destroys the profit of this job. Time costs money. If the job completion time is lengthier than the time allocated, productivity goes down and profits go out the window.

Pay attention. Follow your plan—the one you bid—and make it happen, on time, on budget and to spec. This is where your cash and profit disappear: low productivity and not delivering on time. Profits sucked up by overhead and, yes, by payroll.

It is a simple concept and quite easy to understand. Let me repeat it so you get it clearly: If you are not moving forward you are going backward. There is no middle ground, there is no treading water, staying neutral, or waiting to see what happens. That’s losing ground.

Unfortunately, we just came out of a long growth trend where business was easy to acquire, repeat business was plentiful, and one could coast, catching a wave and riding it into success. Yes, you promoted, advertised, had brokers… but the demand kept you high and dry. It was a time of plenty and we got used to it.

This is no longer true. You cannot maintain the same low intensity efforts and expect to get the results you used to get and now need… desperately. The days are hard and many have gone bankrupt, loans have been defaulted and loan workouts is no longer an option but a must.

It is a simple concept. You must turn over every stone, call back every satisfied client, keep quality high and pricing reasonable—the customer base must envision exceptional perceived value from your goods or services. Your job is now a relentless pursuit of new business and the satisfaction of repeat customers.

Relentless Pursuit!!!

Every call must be returned, every opportunity for additional revenue must be followed up on. There is no time for slacking off and the energy must be aimed at income production. Keeping busy internally–e.g. keeping busy supporting your five largest customers (while also very important)–is inadequate to carry the day.

You must think of ways and implement new and different methods to capture additional revenue. This is your objective. This, along with reinventing your business and loan workouts are your path to survival and then emergence as a leader and a success. This is the way—relentless pursuit of additional revenue, new clients and active support of repeat business.

It is no longer effective to be a follower, you must become a leader. You must innovate, be creative, and go out and bag your business. You cannot wait for it to come to you or you will lose. It makes little difference what worked a year ago, what worked always. It is a new age, a new business arena, and only the aggressive, innovative pursuit of business will result in survival. You can no longer wait for it to arrive on your doorstep. Those days are gone. Move forward, get your goals and move again to the same direction. There’s no turning back.

Yes, if you are not going forward, you are going backward. There is no neutral, holding your own, maintaining. There is either growth or decline. Growth comes only with relentless pursuit.

Do it.

Yes, paying sales commissions is the usual norm in motivating your sales force. Almost every sales department has such an incentive. But, is it really the best way to go? What follows might be out of the norm.

If you have trained your sales force well and given them the tools they need to succeed, it may be more effective to remove sales commissions and pay quarterly bonuses based on personal success, team success and company success. This way the star is not performing for himself only, and is not the glory-hound we all know. The average producer who works hard, does his best and performs well (but not at the all-star level) will not be left behind in a bonus system.

Bonuses produce teamwork and greater cooperation which means better service for the clients and more respect for the company’s goals and objectives. They also allow you to reward individual successes and to create a real team effort where people learn to work together for a better result— a result in everyone’s best interest. Thus, if we reward salespeople for their individual efforts, their team success and the company’s success, we get a much better result than by simply paying commissions for sales made individually.

This approach still allows you to reward individual success but it de-emphasizes the specific sales volume while emphasizing overall success… that’s good. Think about it. I have long said that I would rather have a sales team of hard-working average sales people working as a team than a sales group with a few hotshots and the remaining staff feeling left behind, unimportant and earning a lot less. The overall results are never as good.

This is not to say that I want to reward mediocrity. I do believe, however, that teamwork and company commitment as well as individual success are collectively better benchmarks for measuring and rewarding success than commissions that only reward sales.

Think about it. Try it, it works.

Here is an important and useful idea (especially in this debt-ridden economy) that can supply an answer to the question, “How do you purchase a business with limited cash?” The answer is easy—assumption of debt counts as logical consideration and will support a valuable purchase of a small business.

Here’s how it works: if there is secured bank debt, the purchaser will simply commit to a debt assumption agreement, promising the seller to pay the monthly note and the costs of default should the purchaser fail. (Beware, this is an empty promise and usually results in default, but that is how it works.)

In the same manner, the same philosophy applies to unsecured vendor debt (landlord debt, etc.). The acceptance of and promise to pay someone’s debt, no matter what the debt be (i.e. “assumption of debt”) is equivalent to valuable consideration to the person whose debts are being covered. Thus, the buyer can buy a business without cold cash by agreeing to assume the debt of the business. The seller is still on the hook and remains obligated if personally guaranteed, but as long as the buyer pays, the seller has received adequate consideration for the transaction, despite no money changing hands.

It is a buyer’s deal, as the seller remains at risk and the business will cash flow the payment stream and thus, the acquisition. However, when the seller is burned out, ready to walk away, out of money and unable to operate and searching for a way out, this type of loan workouts work very well.

More typically, a deal is structured with some cash and some debt assumption, as the money is the incentive for the seller to pack it in and leave, while the assumption of debt presumably gets the seller off the hook and allows the buyer to cash flow his acquisition.

New blood, maybe more funds, can make the difference between the new buyer’s success and the old seller’s defeat and loss. Go shopping, buy a business or two and use assumption of debt as consideration. Assumption of debt is the deal maker for both parties.

It is not getting better.

Stop waiting to make the necessary adjustments required for your long-term survival. What we have now is what we will have for a very long time. You cannot simply “wait for the clouds to pass.” They are not going away. The economy is not going to get better for a long while.

• Unemployment rates will remain the same, with modest adjustments up or down (probably down) meaning fewer people will be spending, and those that are employed are spending less.

• The real estate market is showing little change, with foreclosures continuing and the commercial real estate bubble next in line to burst. In other words, more downward pressure on the economy and spending. The trades are devastated because of the huge downturn of demand for new homes.

• Cities and states are broke and the public unions are sapping the lifeblood out of the cities remaining reduced revenues.

• Taxes will continue to rise, increasing overhead for the already crippled small business owners.

• Consumer purchasing attitudes are changing dramatically. People are buying less, wanting a good deal when purchasing and not squandering money on unnecessary wants.

Yet the newspapers are telling us we are gaining ground, that things are better, that we are turning the ship around. Please do not believe this wishful thinking. Things are not better. We are not turning this problem around and what we have now is what we will have for a long time to come.

The only prudent path to take–the only plan that makes sense–is to prepare for the worst and hope for the best. So, let us assume that the business conditions we have now are what we will have for a long while, and that they will possibly get even worse along the way in some areas and industries.

I hear far too many small business owners telling me that they are “hoping” things will get better. Hoping is fine, but acting as if things are going to get better, making that part of your plan, is not the way to go… at all.

If I am wrong, no harm done. You will be ready to take advantage of the upswing. If I am correct, you had best heed my advice and make the necessary adjustments now, before it is too late.

Downsize, re-invent your business model and Do the loan workout! Debt kills… quickly.

Stop deluding yourself, believing your wishes will come true. Be practical and pragmatic. Do the loan workout now, before it is too late.

What if I am right?

Contact us for help and direction. We will arrange a no obligation teleconference for us to review the strategies you need for survival.

There are lots of factors that can bankrupt a business. Once started, the downturn is very difficult to reverse. One thing leads to another and soon you are operating below the break-even point, getting by juggling payable with receivables, exhausting lines of credit and credit cards, being put on COD terms, defaulting on sba loans, bank loans and leases… and it becomes impossible to break the cycle. It’s impossible to emerge, escape, grow out of it; there’s no cash for sales expansion, marketing or introducing new items. No gasoline for the engine. You’re stuck below the break even point, resources exhausted, ripe for the vultures.

Your business will sputter to a standstill and perish — another statistic. Another business that ceased operations with its owners losing everything and being forced to declare bankruptcy, adding insult to injury.

Are you not taking a check? That won’t work. It is not even a noble idea. The point is simple: if the business cannot pay its way, kill the business. It does not deserve to exist and waste valuable resources and time. Why would you continue if the business isn’t able to provide you with a reasonable paycheck aside from retained earnings?

And yet, small business owners–be they men or women–hold on to their failing businesses way too long waiting for something to happen, staying loyal to the end, protecting jobs for one more minute, wasting precious resources and the time and effort of many people.

Make a wise business decision. If the business is not working — if you are unable to provide what is needed to support its success — then the business model is wrong and it must be stopped before other valuable resources are wasted.

Are you out of capital? Running below the break-even point? Not taking a check? Kill it–it is dead already, you are just unwilling to admit it. Bury it.

There are too many people depending upon you to make good business decisions. Do not let them down.