restructuring business debt - practical strategies from banker's u

Practical Strategies

to

Restructuring

Business Debt

Some Business Statistics What is Debt Restructuring The Warning Signs Business Questions to Answer Classifying Creditors Calculating a Monthly Budget Writing a Hardship Letter Business History Profile Payment Plan Cover Letter Initial Re-Payment Offers Other Basic Strategies to Reduce Debt

In this presentation we’ll discuss:

Practical Strategies to Restructuring Business Debt

How Important are Small Businesses to the U.S.

Economy?

How Important are Small Businesses to the U.S.

Economy?

Small firms:

Represent approximately 99% percent of all employer firms. Employ half of all private sector employees. And pay more than 45% of total U.S. private payroll. Have generated 60 to 80% of net new jobs annually over the

last decade. Create more than 50% of non-farm private gross domestic

product (GDP).

Sources: U.S. Bureau of the Census; Federal Procurement Data System; Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration.

Small firms also:

Supply more than 20% of the total value of federal contracts. Produce 13 to 14 times more patents per employee than large

patenting firms. These patents are twice as likely as large firm patents to be among the one percent most cited.

Are employers of over 40% of high tech workers (such as scientists, engineers, and computer workers).

Are over 50% home-based and 3 percent franchises. Make up an average of 97% of all identified exporters and

produced approx 29% of the known export value.

Sources: U.S. Bureau of the Census; Federal Procurement Data System; Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration.

How many businesses open and close each year?

Annual estimates for businesses with employees:

672,000 new startup firms

and 545,000 closures

(* both are estimates and averages about 10 percent of the total)

For those closures, the

clock was ticking

Research shows the majority of closures is the result of cash flow issues

and the burden of debt

What Is Debt Restructuring?

Debt Restructuring is the process of negotiating new

payment terms with existing creditors

The purpose is to satisfy your creditors on a budget

you can realistically afford.

In Restructuring Debt, You Have to See…

The Warning Signs

• Cash flow isn’t enough to handle all the expenses

• Debts are continually put off

• Some new or negotiated payment terms with creditors have now become a burden.

The Warning Signs

• Running past due on more than a third of payables

• Shuffling to pay smaller creditors verses larger

• Bouncing checks or have been contacted by collectors

The Warning Signs

When these signs are present, it’s time to develop a practical and realistic plan to

satisfy creditors and survive

You’re not alone…

Reduce CostsIncrease Income

Restructure LiabilitiesRestructure AssetsRaise more CapitalExit the Business

Basic Strategies to Get Out of Excessive Debt

1. Reduce Costs There are two principle ways to reduce costs: look for big

savings, or make small cost reductions across the board. To make savings across the board, set a savings target (say, 10%)

and reduce each budget by that amount. Then take small steps to reduce traveling costs or opting for equipment alternatives or leasing, etc.

2. Increase Income Increasing the amount of money flowing into your business, as

in increased marketing, cross-selling to existing customers, offering special deals for additional or advance orders, getting referrals with other organizations and/or affiliates.

Raise your prices based from a comprehensive study. Find alternative sources of income. Rent unused office space,

consider selling advertising space on your website (Google Adsense, YPN, MSN Adcenter, affiliates) or in physical spaces you have available, obtaining commissions from other organizations.

3. Restructure Liabilities Restructure liabilities for more cash, and/or reduce the amount

of debt. Agree to longer or reschedule payment terms with suppliers. Replace or consolidate existing loans with lower interest rates. Defer tax liabilities (requires specialist tax advice). There are two other principle ways to reduce costs: look for big

savings, or make small cost reductions across the board. For savings across the board; set a savings target (of approx.

10%) and reduce each budget by that amount. Reduce misc. costs or opt for equipment alternatives, leasing, etc.

4. Restructure Assets Sell unnecessary assets (example: surplus/old equipment, cars) Convert necessary assets into liabilities: sell to a finance

company and lease them back. Factor invoices (this can reduce the asset value of the invoice,

but can raise immediate cash). Use investments or cash to pay off loans.

5. Raise more Capital Find investors or sponsors. Issue more shares to current investors.

Obtain grants if applicable.

6. Exit the Business Sell the business. Sell off all or limited business assets (including the business

goodwill, or partial client base) and use the proceeds to pay off liabilities of issue.

A Practical Action Plan


Business debt can be a good thing and working through it can be a very stressful event. It can help you to establish

your business, fund growth or invest for the future.

On the other hand, if the level of borrowing becomes excessive it can lead to many problems without a

practical action plan.


If the level of borrowing becomes excessive it can lead issues such as:

• Running out of cash • No contingency to deal with unexpected

costs • Reducing the value of the business • Losing the confidence of stakeholders • Inability to invest • Reduced service/product quality • Employee conflict and many more...

In a turbulent time it’s important to remember a few vital steps

Businesses in a Restructure Process Need To:

• Realize that the business is in economic crisis

• Reinvent the business mission and vision

• Redefine the business’ value proposition

• Refinance the business

• Redefine leadership and roles

• Rethink marketing and communication

• Redistingush from competitors

• Resign the organization and network

Businesses in a Restructure Process Need To:

Some Other Things to Consider Before Restructuring and

Questions to Answer

• First, what is the future potential of the business?

• Then, is restructuring worth the time and energy that it takes to work on a recovery process?

• Is the business willing to revise and renegotiate?

• Which debts need to be restructured and their amounts?

• What amount can be realistically put towards these debts?

How Should Creditors be Restructured?

Classifying Creditors

EssentialCreditors

A

ImportantCreditors

B

Decision Maker

Non-EssentialCreditors

C

Without their product, services or equipment, you would not be able to operate.

There is really nowhere else to purchase the product, service or equipment as priced.

These creditors should not be restructured and are critical to survival of the business.

A List – Essential Creditors

Vitals

B List – Important Creditors

Creditors that are still willing to sell to you.

Their products, services or equipment may be important, but could be purchased elsewhere.

Currently carrying a past due balance, but not pushing for payment.

Are no longer willing to do business with you.

Have stopped giving you credit and you do not need to do business with.

Are not critical to your survival.

Have placed the account in for collection.

C List – Non-Essential Creditors

A Framework for Recovery

What a realistic amount to pay on a consistent monthly basis toward excessive debts?

What is your cash flow and how much is left on average each month without designated restructured debts amounts?

How Much Can You Afford Each Month?

Average Projected Monthly Revenue =

minus –

Average Projected Monthly Expenses =

Equals = Average Monthly Gross Profit:

Calculating A Monthly Budget

1. Calculate your average projected monthly revenue.

2. Then calculate the greatest monthly variable (example: your high revenue month minus your lowest) This is your number for next slide.

3. Now calculate your average projected monthly expenses.

4. And then subtract average projected monthly expenses from your average projected monthly revenue.

* Please refer to workbook guide

75% of Avg. Monthly Gross Profit =

multiply by item #2

then, divide by totaldesignated debts =

equals =Profit Variable:

subtract Profit Variablefrom Average GrossProfit =

Monthly max Debt Payment budget =

Calculating A Monthly Budget

5. Now calculate 75% of your average monthly gross profit.

6. Then multiply by your greatest monthly variable (from item #2 of previous).

7. Divide by total designated debts.

8. This equals your profit variable.

9. Now subtract your average profit variable from average gross profit

10. This is your debt payment monthly budget.



multiply by item #2





Calculating A Monthly Budget – worksheet


minus –



Note: taking a conservative approach when calculating your revenue and expense projections will help in times when cash flow is exceptionally tight.


multiply by item #2





Calculating A Monthly Budget – example

$1,875

$25,000

$225

$3,000

$2,275

$2,275


minus –



$10,000

$7,500

$2,500


Calculating A Monthly Budget – example


Divide by totalDesignated Debts

Equals % =

This is the max monthly % you can afford to pay toward debts

$2,275

9.1%

$25,000

• If you can afford to pay 9.1% of the designated debt each month it would take approximately 10-12 months to pay off and is considered a moderate cash flow issue.

• Above this percentage would be considered a minor cash flow issue and take less time to pay off.

• And below this percentage would be considered a major long term cash flow issue of more than a year.

Example shown above. Percentages may vary and it is advisable to seek

professional help for major debt issues. * Please refer to workbook guide

Writing A Proposal and What To Include

Hardship Letter

Business History and Profile

Payment Plan Cover Letter

Initial Re-Payment Proposal

Any personal tragedy such as a serious illness, divorce or death in your family.

Any disaster, such as a fire, flood or property damage adverse weather issue.

If you are behind on any taxes and whether there are any tax liens against you or other debts.

If your home is in, or close to being in default or foreclosure.

Any personal tragedy such as a serious illness, divorce or death in your family.

Any disaster, such as a fire, flood or property damage adverse weather issue.

If you are behind on any taxes and whether there are any tax liens against you or other debts.

If your home is in, or close to being in default or foreclosure.

Writing Your Hardship Letter

Can you demonstrate your hardship? If so, creditors may be persuaded to go beyond their normal outstanding balance settlement parameters. A hardship letter

is personally addressed to the creditor and should adequately describe the issues affecting you and your business that have contributed to your financial dilemma.

A template hardship letter should include things like:

If you are personally liable and you have little or no assets or equity in your home.

The loss of key equipment due to repossession or breakdown.

Any secured loan that is in default or is in the process of consolidation.

Any existing lawsuits or changing regulatory issues.

If you are personally liable and you have little or no assets or equity in your home.

The loss of key equipment due to repossession or breakdown.

Any secured loan that is in default or is in the process of consolidation.

Any existing lawsuits or changing regulatory issues.

Business History Profile

Your profile should be in a checklist format and include a detailed analysis of the following items:

Your general company information.

Start date, business type and company description.

Financial hardship and how the company has been affected in the areas of – Sales, Cash Flow,

Expenses and/or Operations.

Three year sales history verses expenses and net profit.

Lawsuits or judgments pending, taxes owed or any other extenuating circumstances.

Actions taken to resolve the debt issue.

The Cover Letter

Should include:

Your contact information on company stationary.

A brief introduction along with an explanation of your current financial situation.

A request in working together to resolve your debt issue and reference review of the attached documents.

Respectfully ask the creditor to hold off on any legal action and ask for their help in attempting to

save the business.

Variance


Separate creditors into classes. Example: Class A, B, C, D, etc

Rate Class A creditors for minimum amount of total debt they will accept as settlement. For example 16% to 20% of the total amount to be paid in full within one month.

Rate Class B creditors who will accepts 30% to 35% of the total debt to be paid in three or four monthly installments with first payment deferred for two to three months.

Rate Class C creditors who will only accepts a minimum of 60% to 70% of the total debt to be paid in seven to eight monthly installments and deferred to begin in six months.

Variance


Rate Class D creditors who want to be paid in full only with one lump sum to be negotiated for payment after twelve months or more based on agreement.

Rate Class E creditors who will accept a combination of class agreements and monthly installment payments.

Agreements: By both (the business and the creditor) should include a cease to any and all collection efforts unless there is a default in the agreement. All workable payments plans should be reviewed by a financial advisor as results will vary based business debt and revenue factors.

1. Put aside your monthly budget like clockwork, even if no payments are scheduled to go to creditors.

2. Keep a good accounting of your reserve funds.

3. Just because a settlement sounds good, it doesn’t mean you can afford it. Be conservative and understand situations will vary.

4. Don’t promise more than you can deliver. Don’t be in a rush to settle what you can’t afford to pay.

5. Cut expenses. If feasible, scale back on an employee or an expense that doesn’t translate to revenue.

A Few Tips to Remember

6. Don’t avoid creditor calls… communicate consistently.

7. Some collectors can be rude. Never sink to their level. If they are unprofessional, ignore rudeness and maintain composure.

8. Contact the creditor if you fall behind on scheduled payments and work out a time to resume payments. Don’t send any further payments unless the creditor agrees to accept the future payments under the existing terms.

A Few Tips to Remember

Note: A Framework for Recovery should include seeking the advice of a

Financial Advisor and an Attorney

A List B List C List

Even if you’re on the right track, you’ll get

run over if you just sit there.

Will Rogers

Obstacles in Restructuring Debt?

so there you have it…

Practical Strategies

to

Restructuring

Business Debt

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