Part II – Credit Access and Debt Restructure: Keeping Your Business Afloat
Welcome back to the second part of our cash-crunch series!
In the previous post, we slashed through unnecessary expenses and sweet-talked our clients into early payments. Now, let’s delve into the world of credit access and debt restructuring.
Unearth the Hidden Credit Gems
Yes, the ‘C’ word can be a bit intimidating, especially if you’re new to the credit game or have a not-so-rosy history with it.
But when the alternative is shutting down or bankruptcy (what happens if you just plain run out of cash), accessing credit is a financial lifeline.
But don’t do this without real preparation.
(And disclaimer here: This does not constitute, nor is it intended to be interpreted as financial advice. Before making any borrowing decisions, you should consult with your accounting and legal professionals):
- Understand the risks involved. Borrowing means repaying, and if you don’t see the clear path to how and when you can repay your debt, then don’t borrow.
- Brace yourself for potential hits to your personal credit score.
- Be ready for that serious commitment – the personal guarantee. If things go south, you’ll be personally responsible for the debt. And when you’re in a cash flow crisis is when these personal guarantees will be required.
Another side note here: The reality about lenders is they don’t want to lend you money when you need it, and they love to lend you money when you don’t need it. So, in the very best of cases, when things are going well is the right time to reach out for access to credit.
With those caveats in mind, let’s explore your sources of additional credit – and again: Buyer Beware – I don’t suggest you do any of these without reading the small print on the agreements. Better yet, have your legal or accounting professional read and interpret it for you.
And these options cost money – what you’re doing in any of these cases is prioritizing cash flow over profitability – which in a cash flow crisis makes sense. In order of risk vs. reward:
- Your Bank’s Open Arms: Talk to your bank about opening a credit line. It could be under your company’s or your name.
- Revamp Your Ride: If your car has some equity, consider refinancing it. It’s like giving your trusty car a chance to be the hero.
- Unlock the Power of Home Equity: A Home Equity Line of Credit (HELOC) can be a treasure trove. Tap into the equity in your home and keep your business afloat.
- The Credit Card Charm: Give your credit card company a ring and ask for a limit boost. If you’re feeling lucky, request an interest rate reduction while you’re at it.
- Fresh Plastic: Opening a new credit card can infuse cash into your business. Whether it’s zero interest or not, when you’re in a financial pickle, any card will do.
- Asset Financing: Some lending companies allow you to take loans against your existing assets, like Accounts Receivable and Inventory. Use your business resources wisely.
- Max Out Existing Credit Cards: Those plastic friends of yours? Check if they still have some credit left. Both personal and business cards could come to your rescue.
- Last Resort: Only when you’re 1000% confident you can rebound soon, consider a loan against your future revenues. But tread carefully; these can have sky-high interest rates hidden in the fine print.
Debt Restructure: The Art of Negotiation
Finally, there is something important to understand. Even though it doesn’t feel like it, when you are in a cash flow crisis, you are in the driver’s seat! This is probably the toughest lesson for me to teach, and it was definitely the hardest for me to learn.
Whether it’s a credit card company, a bank, they need to understand that helping you helps them. Ultimately, if they don’t help you resolve this, you will end up not being able to pay them back at all. That’s a Lose-Lose. So, remember that when you are dealing with them. It doesn’t mean to be arrogant or non-committal – that will absolutely backfire on you. But don’t allow yourself to be bullied. You deserve better than that.
Lending is a risk that banks choose to take, and that risk is the basis of their profit model. Do not let them shame you.
So, talk to them about other ways to get them paid. This is called restructuring debt, and it beats defaulting any day.
Remember, you’re not asking for charity; you’re proposing a win-win solution.
Here’s how to navigate this delicate conversation:
- Acknowledge the debt
- Explain your current financial challenges
- Propose a mutually beneficial arrangement, which could involve delaying payments, changing the payment amount, negotiating for a lower interest rate, or even reducing the total debt amount
Keep in mind that both you and your creditors want a positive outcome. After all, it’s in everyone’s interest to see your business thrive.
A Parting Note – about Entrepreneurship
Whether you’re bootstrapping or backed by investors, there comes a point when extra cash is hard to come by for almost every entrepreneur. It comes at start-up; it comes when you’re growing; sometimes it comes when unexpected things happen.
Hold your head up high no matter what. You are doing what few dare to do, and I, for one, honor you.
Our entrepreneurial financial journeys are epic sagas, and we’ve got more than one plot twist up your sleeve; that’s what makes us entrepreneurs!