When You're in Trouble
You're aware of a pain in the pit of your stomach day after day,
and you know it's not because you've been eating too much chili
lately. You suspect that gnawing feeling means you're in real financial
trouble -- but you hate to find out more because it might be true.
However serious the problem, it doesn't mean the world will end
(although you might wish it would). Ask any successful entrepreneur
if their biz (and life) was ever on the brink of financial disaster,
and you're bound to hear "you bet!" In fact, most say those days/months
of disaster became the catalyst for their later success.
Maybe you don't have enough money flowing in. Maybe you don't
have enough clients. Maybe your fees are the culprit -- too low.
Or maybe the industry-wide downturn is dashing your enterprise against
Whatever the reason, you're hitting tough times -- and you're
scared. Let's look at the challenges ahead and create a plan of
1. Collections: Getting What's
Coming to You
2. Bankruptcy: The Very Last Resort
3. Dealing With Guilt
4. Communicating With Creditors
5. Web Links
1. Collections: Get What's Coming To
If your business is suffering because people who owe you haven't
paid, that's the first place to put your attention. You, like most
business owners, probably hate to have to ask for the money you're
owed, but considering the alternative, just dust off your pride
and go to it (or get an employee, contractor, or collection agency
to do it for you).
First, stop being such a nice guy. Just explain -- up front --
your company's collection policies and stick to it. Here are some
tips you can start using today to stop future bleeding. (Remember
it's YOUR money we're getting here; if clients won't pay, they aren't
worth dealing with.)
Tips: Scaring off deadbeats
- Turn down clients who look like poor credit risks.
- Require a full or partial upfront payment.
- Ask for progress payments during the life of a long project.
- Offer a small discount for early payment.
- Add an interest charge to late payments.
- Stop work for non-paying clients
Tips: Reeling in deadbeats
You can't afford to be patient. The sooner you start calling overdue
accounts, the sooner you'll see your money, and the shorter the
collection process will be. In fact, set the pace by calling accounts
a few days before the payment is due just to be sure they received
the bill, don't have any questions, etc. and to ask if they'll be
making the payment on schedule.
Don't wait more than 5 days after the payment is overdue to call.
You don't have to be mean or demanding (yet), just inquiring about
whether they have the bill and find out when they plan to pay.
Sit down every month and review all the bills owed you. Take some
action on every past-due account. Mail a second invoice, with a
notation or stamp that says "past due" or "second invoice." Follow
up with a phone call.
If you still don't get your money, write a straightforward letter
reminding the client the bill is overdue. Follow up with a phone
Still no payment? Send another letter, explaining that your policy
is to turn over past-due accounts to a lawyer or a collection agency
if payment is not sent by a certain date.
Hire a lawyer or collection agency.
2. Bankruptcy: The Very Last
Only after you have totally exhausted all other avenues, should
you even consider bankruptcy. Even if you just declare bankruptcy
temporarily and manage to work your way back out of it, it'll be
much harder to run your business "as normal" in the future.
It will be extremely difficult to get loans, new credit cards
or other types of credit.
If you do manage to get any financing after a bankruptcy, it's
likely to cost an arm and a leg.
The stigma of the bankruptcy may scare away many of people your
business needs most -- good employees, suppliers and customers.
There are basically two flavors of bankruptcy -- both bitter:
Bitter-sweet: A Chapter 11 bankruptcy is a chance at reorganization.
The filing halts all collection, foreclosure and lawsuit actions.
This buys you time to reorganize your debts by devising a payment
plan with creditors. Unless a judge says otherwise, you retain ownership
of the business and control of its operations.
Bitter-bitter: A Chapter 7 filing -- the end. This means
liquidation! A judge appoints a trustee to oversee the business,
and can order the sale or seizure of assets in order to repay creditors.
But bankruptcies are often avoidable, even at the eleventh hour.
You might be able to sell or lease-back assets, recapitalize (albeit
at high interest rates), or offer rights for shareholders to purchase
more shares at bargain prices.
Steps in undertaking bankruptcy:
Timing is key. You may not want to succumb, but wait too long
and your assets may deteriorate to the point that a successful Chapter
11 reorganization isn't possible.
Hire an attorney who specializes in bankruptcy to file a petition
in Federal Bankruptcy Court and advise you.
Small firms, whose aggregate secured and unsecured debt is $2
million or less, may not be required to meet with a committee of
creditors. Instead, if the court agrees that enough information
has been supplied to all creditors, they can present a repayment
plan for approval by the court.
Small firms must file a reorganization plan within 100 days of
the bankruptcy filing, and all plans within 160 days.
Bigger firms must file a plan within 120 days, and all plans within
A business which is unable to resume after a Chapter 11 filing
can file for liquidation under Chapter 7.
Dealing with Guilt
After you identify the causes of your business problems and the
extent to which you were responsible, resolve to make this a learning
experience. Remember that all smart people make mistakes -- but
the really smart people recognize them when they happen. Remind
yourself that Thomas Edison failed hundreds of times before he successfully
invented the electric lightbulb.
Olivia Mellan, a Washington, D.C., author and psychotherapist
who specializes in money issues, offers this advice:
You lost some money--okay. But don't berate yourself. You're
not "flawed" or "bad." These powerful words can derail you if
you're not careful.
When you're panicked and can't think clearly, use your favorite
relaxation technique to calm down -- exercise, music, a bath,
When you're calmer, analyze what went wrong. Figure out what
you contributed to problem, and what was due to forces beyond
your control. Did the market dry up? Were you undercapitalized?
Did a partner make unwise decisions without your knowledge? Or
did your business just spend more money than it could make?
After you've analyzed the situation, learn what you can from
it and move on.
Resolve feelings of shame by sharing them with non-judgmental
people. This can be a friend, family member or therapist.
Read a few articles or biographies of famous business people.
Reading about their mistakes and failures can be comforting.
Remember that you are not alone. This has happened to lots of
The best way to deal with guilt is to take positive action. When
you're in the midst of feeling guilty, you often feel that there's
nothing you can do to change the situation. Don't expect to turn
everything around all at once -- take one small step at a time.
Don't give yourself impossible goals ("I'm going to pay all my bills
entirely next month."). Instead, give yourself achievable, although
sometimes unpleasant, small tasks ("I'll talk to one overdue credit
account today and make arrangements.") Biting off small tasks may
make it possible to swallow all the bad feelings and make a big
4. Communicating with Creditors
When you're in trouble, your natural inclination is to run away
from it -- dodge telephone calls, have your employees make excuses,
ignore letters -- hoping by some miracle that if you ignore it,
the trouble will go away. Not so, of course, so whatever you do,
don't give creditors any reason to think you're avoiding them. Just
explain the situation -- it may not be what they really want to
hear -- but at least it's the truth, and you won't catch yourself
up trying to remember what lies may have been told to whom.
Each creditor, of course, wants his money. But ask if there's
any barter arrangement that might provide them of something of value
your company could provide (that's not money, per se).
If they don't go for that option, get out partial payments to
all creditors whenever you get any money in. Even if the amounts
of each payment are embarrassingly low, it'll show people you are
alive and trying, and give them the best confidence that eventually
they'll get paid. And it will give you the most freedom from their
phone calls -- if creditors feel like something positive is happening,
they may not have to bug you as often, so you can focus on trying
to make money.
5. Web Links
Site of Debt
Counselors of America a non-profit group that assists individuals
and families trying to clean up their debt.
For debt management:
Harrison, Lynn. Extending Credit and Collecting Cash:
A Small Business Guide (Crisp Publications, $15.95)
Mellan, Olivia. Overcoming Overspending (Walker,
$18.95), and Money Harmony (Walker, $9.95).
For industry statistics and financial ratios:
Robert Morris Associates
1650 Market Street, Suite 2300
Philadelphia, PA 19103