If your business is financially troubled, you may not have to take bankruptcy. There is an alternative that would allow you to continue to operate without the supervision of a bankruptcy court. The alternative is an out-of-court financial workout.
What is a Financial Workout?
A financial workout is actually a proposed repayment agreement to creditors. The firm must show that it can generate enough cash flow from future income to sustain its operations and payback its creditors. The creditors could also be paid back through new equity invested in the firm or new debt financing. It is difficult to find new equity investors when a firm is in financial difficulty because they are afraid they will lose their investment. It is also difficult to find a lender who will supply debt financing although some financial institutions might lend money at very high interest rates. You should think twice before taking such a deal.
Prior to meeting with creditors, the owner of the small business firm must put together a reorganization plan showing how it will sustain itself on a cash flow basis going into the future. This involves preparing forecasted financial statements for three through five years into the future. The financial statements should show how the firm can sustain itself and generate enough cash flow to also pay off its creditors.
Hiring a Financial Workout Expert
A financial workout is complex and usually involves many creditors. It is usually handled by an business bankruptcy attorney, a Certified Financial Planner, or another financial professional such as a Certified Professional Accountant. There is no set format for a financial workout. It can include any provisions that are acceptable to both the small business and the creditors that are involved. The financial professional that you hire is generally responsible for preparing the forecasted financial statements and negotiating with the bank and creditors.
The Bank and The Creditors
Financial workouts are difficult particularly if there are a number of creditors involved. If one or two creditors don’t agree to the terms of whatever agreement is reached, the workout will fall through and then the firm will have to file for bankruptcy. An out-of-court workout depends completely on whether or not the creditors are willing to work with the small business and each other. If the small business satisfies the objectives of the creditors, then the workout will be successful. If not, then it will not be.
Perhaps the most important creditor, relative to the success of a workout, is the secured creditor, which is usually the bank. A small business has assets that are usually used as collateral for loans by a bank. A bank has the option of foreclosing on such loans if the business has defaulted. A financial workout enables the business to at least have a chance to talk to the bank before this happens. The business has to give the bank access to its financial records. If the bank agrees to enter into an agreement with the business, then the business can talk with its unsecured creditors or those to which the business owes money but collateral is not involved.
The unsecured creditors usually include the suppliers and vendors of the business. They may agree to take a portion of what is owed to them simply because they would rather get some of what you owe them rather than risk getting none of it if you go out of business. Bankruptcy would not necessarily give them all of their money.
A financial workout plan is a cheaper alternative to bankruptcy. It is at least an option to explore before filing for bankruptcy through the federal court system.
