Avoiding Foreclosure and Bankruptcy -- Working with your Vendors and Bank

Some manufacturers and retailers in our industry are finding themselves in a cash flow squeeze and fearful that they may soon be unable to fulfill their obligations to vendors, landlords, banks and other creditors. There are several strategies and actions a company may pursue under such circumstances.

After first reducing all unnecessary overhead, performing financial triage and taking other cost saving steps, but before receiving a notice of default from the bank or landlord or being sued for collection by vendors, companies that are in financial trouble should consider communicating with their creditors, especially their lender. Lenders and other creditors may defer payments as well as interest, principal and claims if they can be persuaded that there is a viable business going forward. Lenders and creditors are more amenable to this approach because in the current economic downturn the company’s assets may be insufficient to satisfy the outstanding obligations. In such circumstances presenting to the creditors accurate information and projections and a viable business plan is essential because there may not be a second chance. The company is essentially asking its creditors to partner with it and “share the pain” therefore, integrity, honest and open communication, and making as many cutbacks as economically feasible, may help persuade the creditors to sign on. While there is always a risk that a nervous lender will act rashly, ignoring creditors or the seriousness of the situation inevitably leads to the creditors taking matters into their own hands (this can be especially harsh if personal guarantees have been given to the creditor thus jeopardizing the guarantor’s personal assets and home, or if certain payables such as payroll and sales taxes remain unpaid which may also lead to personal liability).

Another alternative, assuming there is a viable business plan, is to borrow funds to refinance the debt or pay payables and vendors that are critical to ongoing operations (e.g., if a retailer requires delivery of sold goods). Traditional banks have tightened their lending criteria; however, there are financial institutions that are continuing to lend funds although sometimes with restrictive covenants and high interests rates (18% to 20% annually is not uncommon). There are some governmental programs available (e.g., the SBA program), although these loans are also more difficult to obtain today than in the past. There is a possibility that the government will create other business friendly programs but, although the situation is fluid, none of our faithful readers should hold their breath for a bail-out. In better financial times it was easier to sell all or a part of one’s business or real estate to raise funds; however, this option has all but disappeared recently.

Ultimately, if bankruptcy is the best option because the company is unable to procure an out of court settlement with its vendors or because of an impending foreclosure action, it should be used as a strategic tool. Such an action will “stay” all proceedings against the company and allow the company to negotiate with creditors in the hope of obtaining a better result than liquidation value. Finally, inside or outside of bankruptcy protection, a company may utilize the expertise of a furniture promotion company that can assist in raising cash or with the orderly sale of the company’s assets.

There are many variables to consider when determining the best strategy if faced with a cash flow crisis. It’s always a good idea to discuss options with a professional such as a financial consultant or bankruptcy attorney. The most important lesson is to be proactive.