Financing Issues and Workouts

One of the most common causes for failure in a small business is a lack of capitalization. Businesses often start up with too little cash. Over time, this lack of money becomes amplified, and ultimately those businesses fail. The reason why they fail is not that they don’t have a good product, lack integrity in the marketplace, or fail to perform. They fail simply because they have run out of cash, in the middle of a normal learning curve in servicing the marketplace. Of course, loans can be helpful, but they do not replace a good business model, which allows for mistakes along the way and sufficient time to perfect your business approach.

Even without the luxury of borrowed funds, entrepreneurs feel much stress once cash flow problems arise. It’s hard to pay loans, salaries, utilities, and all the other bills that become due. The pressure increases. Whether there are loans or not, the bills must be paid, and relatives, credit card lenders, and banks are insistent. Frequently, the issue becomes the “burn rate”. In other words, “how long can a business hold on?”

Often the bank or lender have no idea what their financial problems are: sound projections and presentation of a good business plan can do much to assist with the renegotiation of debt. In any event, when default on the loan occurs everyone loses. Neithe the bank nor the borrower obtain anything from insolvency proceedings.

For this reason, our office seeks to help entrepreneurs with planning procedures, before cash flow problems arise. Nevertheless, when these crises do arise, sound counsel is necessary to navigate the dangerous waters of default and reassure the bank that the storm can be weathered.

Sometimes assets need to be sold, lines of business need to be assessed for profitability, and real estate mortgages or personal guarantees need to be added to strengthen security of outstanding loans. Nevertheless, if the entrepreneur believes his value proposition is sound, he is wise to “bet the farm” on his expertise, and continue to plow ahead. In these cases, reassuring the bank, returning liquidity to the business model, and moving toward profitability is an immediate necessity many lawyers lack this kind of business experience, and cannot be of help in this area of business. When faced with the task, most human beings like easy work. Negotiation of loans can be hard work.

I still remember the entrepreneur who came to me to explain his business was not profitable, and he didn’t need the large amount of warehouse space that was under lease. In addition, he was in danger of defaulting on the lease, and having the goods warehoused subject to a landlord’s lien. While exploring his options, he realized as we talked that a competitor (who was a dear friend) might be willing to give him storage space, and even assist him with expanded lines of credit. Since moving his location he is much happier, and profitable too!

In another case the individual owned the real estate from which his business operated. By selling the real estate he was able to become current with suppliers, giving him enough time to sell additional customers, enhancing his profitability. Further, the cash received from selling the real estate allowed him to progress forward without financial worries.

Of course, there are a myriad number of options that a good business lawyer helps his clients explore every day. As a small business owner myself, I believe that the key is flexibility. When we listen to our clients, their needs can best be served by applying our experience to assist them in creating satisfactory legal results.

If you are in need of this kind of help, please do not hesitate to give us a call for a candid opinion as to whether we can help in your situation. We would be more than pleased to be of assistance to you. Call us today at (317) 266-8888. As an alternative, you can email me personally at any time: mike@mikenorrislaw.com.