When You're in Trouble

What looked like a cash-flow crunch a few months ago has turned into serious financial trouble. Clients are cancelling, creditors are calling. You'd like to raise prices -- your costs have skyrocketed -- but you'd lose even more customers. And it looks like there's going to be an industry-wide downturn.

Is it time to bail out? Maybe, but maybe not.

An honest analysis of your business prospects and your credit situation -- and your attitude toward it -- will help you catch yourself before you fall deeper into financial trouble.

Take the self-exam below to find out whether things are really that bad -- or whether they're worse. Then look at our tips for turning things around -- starting with reeling in the money you're owed.

Table of Contents

1. Self Exam: How to Know You're in Trouble

2. Collections: Getting What's Coming to You

3. Bankruptcy: The Very Last Resort

4. Dealing With Guilt

5. Communicating With Creditors

6. Resources

1. Self Exam: How to Know You're in Trouble

1. Is your business financed by credit cards alone?

2. Do you owe 20% or more of your net income to creditors?

3. Are you charging items you once bought with cash, like groceries?

4. Do you have no savings or credit lines left?

5. Is your business continually going down, even in normally high seasons?

6. Are you losing regular and long-time customers?

7. Do you pay off one credit card with another?

8. Do you stash your bills away unopened?

9. Are you reluctant to total up how much you owe to everyone?

10. Have you been denied credit?

12. Are you avoiding creditors when they call?

13. Are creditors starting collection actions and lawsuits against you?

14. Are you behind in your taxes?

15. Do you have liens against your property or assets?

Scoring

If you answered "yes" to questions 1 through 6, you're on the verge of financial trouble. You need to take action to prevent yourself from going over the credit edge. This may take the form of reassessing your business, making arrangements with creditors, and finding additional income sources quickly.

If you answered "yes" to questions 7 through 12, you're in financial denial. Pull your head out of the sand and face your issues squarely. They won't go away by ignoring them.

If you answered "yest to questions 13 through 15, you're in financial hot water. You need to take steps to improve your business now, perhaps find a buyer or investor, and to clean up your credit before it gets any worse.

2. Collections: Getting What's Coming To You

One of the hardest parts of dealing with money is asking for it. Collecting past-due bills may be one of the more unpleasant tasks you undertake as a business owner. Instituting a fair but firm policy from the very beginning of your business is one of the best ways to safeguard against dead-beat accounts. But every business owner has to deal with people who owe her money.

What's the best way to do that? Follow up on overdue invoices faster or more often. Redesign your collection procedure, perhaps by reassigning the managers responsible for collections or involving your sales staff in collection efforts. Upgrading collection software and computer systems can also help. The last resort: Hire a collection agency or lawyer.

Tips: Scaring off deadbeats

• Turn down clients who look like poor credit risks.

• Require a full or partial upfront payment.

• Ask for progress payments during the life of a long project.

• Offer a small discount for early payment.

• Add an interest charge to late payments.

• Stop work for non-paying clients

Tips: Reeling in deadbeats

• Decide how patient you want to be. Do you start notifying past accounts after 20 days? 30? 60? Set a policy, and notify all your clients.

• Sit down every month and review all the bills owed you. Take some action on every past-due account. Mail a second invoice, with a notation or stamp that says "past due" or "second invoice." Follow up with a phone call.

• If you still don't get your money, write a straightforward letter reminding the client the bill is overdue. Follow up with a phone call.

• Still no payment? Send another letter, explaining that your policy is to turn over past-due accounts to a lawyer or a collection agency if payment is not sent by a certain date.

• Hire a lawyer or collection agency.

3. Bankruptcy: The Very Last Resort

Only after you have totally exhausted all other avenues, should you even consider bankruptcy. Even if you just declare bankruptcy temporarily and manage to work your way back out of it, it'll be much harder to run your business "as normal" in the future.

• It will be extremely difficult to get loans, new credit cards or other types of credit.

• If you do manage to get any financing after a bankruptcy, it's likely to cost an arm and a leg.

• The stigma of the bankruptcy may scare away many of people your business needs most -- good employees, suppliers and customers.

There are basically two flavors of bankruptcy -- both bitter:

• A Chapter 11 bankruptcy is a chance at reorganization. The filing halts all collection, foreclosure and lawsuit actions. This buys you time to reorganize your debts by devising a payment plan with creditors. Unless a judge says otherwise, you retain ownership of the business and control of its operations.

• A Chapter 7 filing, however, is bankruptcy with a capital B. This means liquidation. A judge appoints a trustee to oversee the business, and can order the sale or seizure of assets in order to repay creditors.

  But bankruptcies are often avoidable, even at the eleventh hour.

Alternatives include:

• Asset sales or sale/lease-backs. Selling non-essential assets or equipment can help you raise cash.

• Recapitalization. A troubled business can seek a new layer of both debt and equity. Certain lenders and investors avidly seek out such opportunities, because of the higher-than-average returns.

• Rights offerings. A troubled business offers the right to buy additional shares to security holders and/or common shareholders at favorable prices.

Steps in undertaking bankruptcy:

• Timing is key. You may not want to succumb, but wait too long and your assets may deteriorate to the point that a successful Chapter 11 reorganization isn't possible.

• Hire an attorney who specializes in bankruptcy to file a petition in Federal Bankruptcy Court and advise you.

• Small firms, whose aggregate secured and unsecured debt is $2 million or less, may not be required to meet with a committee of creditors. Instead, if the court agrees that enough information has been supplied to all creditors, they can present a repayment plan for approval by the court.

• Small firms must file a reorganization plan within 100 days of the bankruptcy filing, and all plans within 160 days.

• Bigger firms must file a plan within 120 days, and all plans within 180 days.

• A business which is unable to resume after a Chapter 11 filing can file for liquidation under Chapter 7.

4. Dealing with Guilt

Feelings of guilt, even shame, can overwhelm you when you're having money troubles. Hiding out, avoiding creditors, pretending nothing's happened, or sniping at family and friends--these are defense mechanisms which provide temporary relief, not a cure. Olivia Mellan, a Washington, D.C., author and psychotherapist who specializes in money issues, offers this advice:

You lost some money--okay. But don't berate yourself. You're not "flawed" or "bad." These powerful words can derail you if you're not careful.

When you're panicked and can't think clearly, use your favorite relaxation technique to calm down--a bath, walk, meditation, exercise, music.

When you're calmer, analyze what went wrong. Figure out what you contributed to problem, and what was due to forces beyond your control. Did the market dry up? Were you undercapitalized? Did a partner make unwise decisions without your knowledge? Or did your business just spend more money than it could make?

After you've analyzed the situation, learn what you can from it and move on.

Resolve feelings of shame by sharing them with non-judgmental people. This can be a friend, family member or therapist.

Read a few articles or biographies of famous business people. Reading about their mistakes and failures can be comforting.

Remember that you are not alone. This has happened to lots of entrepreneurs.

The best way to deal with guilt is to take positive action. When you're in the midst of feeling guilty, you often feel that there's nothing you can do to change the situation. Don't expect to turn everything around all at once -- take one small step at a time. Don't give yourself impossible goals ("I'm going to pay all my bills entirely next month."). Instead, give yourself achievable, although sometimes unpleasant, small tasks ("I'll talk to one overdue credit account today and make arrangements.") Biting off small tasks may make it possible to swallow all the bad feelings and make a big improvement.

5. Communicating with Creditors

When you're in the midst of financial difficulty, you often feel that you're alone, and you're the worst offender your creditor has ever dealt with. Neither is true. Your own embarassment and disappointment often keeps you from wanting to deal with people or institutions you owe money to, but they're usually more impressed by someone with difficulties who communicates with them rather than keeps the problems hidden until it's too late.

As soon as you see a problem on the horizon, start the communication process. You don't want to scare your lenders before there's a real problem, so it's probably a good idea to have an ongoing communication system even when times are good. That way they won't be as concerned about a short term downturn. As soon as you see you're encountering a problem, ask their help, particularly for resources they may know to help you turn the problem around. Discuss adjustments in your payment terms to enable you to have more cash to build the business to increase revenues, but be willing to show them you're taking constructive steps to reduce costs and improve your business practices.

Talk to your creditors. Make arrangements when you're in trouble. Most creditors would rather get a small amount every month than have to write off a loan or debt entirely. Put new arrangements in writing: send follow-up letters detailing the arrangements you've reached with them so there can be no misunderstandings. Be businesslike.

6. Resources

For debt management:

Harrison, Lynn. Extending Credit and Collecting Cash: A Small Business Guide(Crisp Publications, $15.95)

Mellan, Olivia. Overcoming Overspending (Walker, $18.95), and Money Harmony (Walker, $9.95).

For industry statistics and financial ratios:

Robert Morris Associates
1650 Market Street, Suite 2300
Philadelphia, PA 19103
215-851-9100

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