Business Debt Reduction, Settlement and Debt Relief

Honesty and Communication Are The Best Policy

May 23 - 24, 2009. With regard to business debt, whether you are a business owner or an individual, the global financial turmoil has placed cash flow under significant strain. The fact that the financial downturn was sudden and severe has exacerbated the crisis.

A large number of South Africans were unable, or unwilling, to rein in their spending, and this has led to personal or business debt levels that are at breaking point. If people you borrowed money from are starting to call and place pressure on you, what is the best way to get out of the mess?

For the purposes of today’s column, I am going to assume that you intend to pay all your debts, and not go in to receivership and liquidate your business. That brings up a host of different issues, which is a topic for a different column.

The most important aspect of managing business debt in times of strife is to communicate openly and honestly with all your creditors and actually engage with them. Sure, in time the cash flow issues may resolve themselves and you may settle your outstanding debts. However, you may well have caused significant damage in the relationship between yourself and your creditor if you ignored them. This in turn may lead to reduced credit facilities, and stiffer repayment terms, neither of which will help you in the long term.

Remember that it is seldom in the interests of the creditor to pursue your business debt settlement matter through legal channels. You can be sure that it will end up before the courts if you stick your head in the sand and hope that the matter blows over. The fact is the matter won’t likely blow over, and they will be more ruthless in pursuing you. They have no real desire to follow that route as it is time-consuming and expensive. Your creditor invariably is in the business of providing a service, and receiving payment for that service. They are not aiming to spend their time pursuing legal avenues to recover business debt, so use this fact to your advantage.

Compromise is in Everyone's Best Interests

You need to try to achieve a compromise that is acceptable, and manageable, to both parties. In order to do this, you need to fully understand your capacity to repay your debts. You can only gauge this by having a firm understanding of your monthly cash inflows and outflows, be it from an individual or a business perspective. You need to go to your creditor with a realistic, and manageable, solution. Being overly conservative on your repayment terms may not indicate a firm desire to settle as soon as possible, whereas being overly aggressive is also not advisable. Unforeseen expenses could put a hole in your plan, and make you default on your agreement repayment package. This could further strain your relationship with your creditor. Once a compromise to repayment terms is reached, it is important to stick to that agreement.

If some unexpected event does occur that makes it impossible for you to meet your short-term repayment terms, what should you do? Again, the best advice is to open and frank with your creditors, and explain and outline the nature of the problem, and the solution that you are putting in place to resolve the issue.

What business debt repayment options can you look at, in consultation with your creditors?

Late charges may apply if you miss your payment deadlines. If they are aware of your financial difficulties, and you have demonstrated a repayment schedule, you may be able to reduce, or remove, these late payment penalties. Try and see whether you can pay only the interest in the short term, as this may prove invaluable in relieving cash flow pressure. Try and extend the terms of the credit agreement, possibly by using a reduction in your facility as a negotiating position. This demonstrates your good intentions to the creditor, as well as reducing their risk exposure.

Cash flow pressure is a reality to many people at present. This may be placing significant pressure on your personal and professional life. Solutions are not simple, and may require hard choices. You may need to significantly tighten your personal or business costs in the short to medium term. You need to fully understand where you can reduce costs, and what you have available for business debt reduction on a monthly basis. Your accountant or financial planner can help you with these calculations. Once armed with this information, approach your creditor with a realistic and manageable plan to settle your debts over time, and then stick to the agreed plan. Most importantly, throughout the whole process ensure you honestly and proactively communicate with your creditor, as this enables your creditor to understand your changing circumstances.

Ian Beere, CA(SA) CFP was Financial Planner of the Year in 2007. His business partner Debbie Netto-Jonker CFP, founder of Netto Financial Services, was Financial Planner of the Year in 2001.