What a Struggling Business Must Do to Survive Under Financial Stress

This article was featured in a recent issue of the Mercer County Woman. It was written by Paul Maselli, a partner with the firm.

The continued success of a struggling business depends on the business owner’s ability to make prudent decisions under financial stress.  In 25 years of representing struggling businesses (and unpaid lenders), I have witnessed many bad business decisions.

A “struggling business” is one that has had past success in timely paying payroll, taxes, rent and other operating expenses, but finds itself in a situation where it is no longer selling enough products or services on a monthly basis to meet its monthly expenses.

The worst decision a business owner can make is to not pay taxes.  Delaying the payment of payroll withholding and employment taxes, sales taxes, etc. can be fatal to both the business and the business owner.  The government has little flexibility in negotiating payment plans or reducing the tax debt,  and strong collection powers.  Taxes are the first priority.

It is foolhardy to not pay rent if there is no place else to run the business.  A landlord has quick access to the courts to obtain an eviction which will effectively terminate the business.

The next priority is the payment of long-term debt to a creditor, such as a bank, with a lien on the business assets –  accounts receivable, machinery and equipment, inventory, etc.  Creditors with collateral can not act as quickly as the government or the landlord, but they do have expedited court remedies which can destroy the business.

Before missing a payment to a creditor with collateral, the business owner should  meet with that lender, disclose the problems, and attempt to negotiate a new payment plan.  Ignoring these types of creditors doesn’t make them go away, it just makes them angry and impedes the resolution process.

Trade creditors with no collateral have the most difficult time collecting which provides leverage in negotiating pay-outs. Trade creditors usually want to keep the struggling business as a customer if it has been a good customer over the years and will usually make an effort to resolve the situation.

Avoid the temptation to borrow on a line of credit to meet cash needs.  This can be fatal.  The credit line should be used only to cover the delay in collecting strong accounts receivable and should be repaid immediately when the customers’ payments come in.

On the other hand, borrowing money when the business is not generating enough sales to meet operating expenses is a temporary fix that will cause more damage in the long run.   If the company’s problems are not addressed because the company can borrow money, that money will soon run out and the problems will still be there.  Except now the problems include the repayment of the borrowed funds.

The best decision for a struggling business is to decide to seek professional help from a business consultant, accountant or lawyer with experience in providing advice to businesses.  While this may create an additional expense in a time when cash is short, it is the smartest decision for resolving the crisis.

Comments are closed.