Denver Small Business Debt Solutions

Small Business Debt Solutions

Who do I mean by small business? For the solutions mentioned below, the small business is incorporated in some manner usually as a Limited Liability Company (LLC) or Corporation (INC) and if a corporation, probably subchapter S corporation. A sole proprietorship is not a separate entity; there is no separation between the business and the individual owner. As such, the sole proprietor will use the individual debt solutions. In addition, the small businesses I work with (and that tend to get in the most trouble with debt or taxes) have $10,000,000 or less, and most frequently $2,000,000 or less, in gross annual revenue. Finally, given the nature of small business, the owners have usually personally guaranteed the business debt, so a comprehensive solution is required that helps both the business and the individual.

Despite the creativity and entrepreneurially enthusiasm, most small businesses fail in 5 years. As such, there are two categories of small business debt solutions: (1) solutions to try and SAVE the business, or (2) solutions that allow the business to fail but provide the owner an exit strategy to minimize the financial consequences of business failure.

Options to Save the Business

Saving a business requires that the business be viable; there must be stable cash flow that can fund operations.  If the business can operate profitably but for the debt load, it may be possible to save the business. The unfortunate reality is that the business owner may not be ready to face the truth about her business. Therefore, an objective evaluation of business viability is required. Assuming the business is viable, here are the options for dealing with small business debt when the goal is to save the business.

Chapter 11 Bankruptcy
In its simplest form, chapter 11 bankruptcy is best viewed as a payment plan. If the business has stable cash flow, chapter 11 may be an option for reducing the overall business debt burden. In addition, if the business has substantial secured debt but the business assets are worth only a fraction of that debt, a chapter 11 bankruptcy may allow the business to pay only the asset value to secured creditors, not the entire balance due. For example, if the business assets are worth $10,000, but Bank of X has a secured loan of $100,000, a chapter 11 bankruptcy may allow the business to buy out those assets for only $10,000.

For most small businesses, chapter 11 can be prohibitively expensive and the practical requirement that the business have stable cash flow to fund a chapter 11 bankruptcy makes it a non-starter for most small business operations. However, if the business model is otherwise viable and the financial setback that caused the debt challenges in the first place was temporary, a chapter 11 bankruptcy will help the business get back on its feet.

Chapter 11 bankruptcy is a complex solution and within chapter 11 bankruptcy there are several strategies that can be used to solve the underlying financial challenges. If you wish to explore and see chapter 11 bankruptcy is right for you, find an experienced chapter 11 attorney. Chapter 11 bankruptcy is a specialized area of practice within the bankruptcy realm. Attorneys that mainly practice chapter 7 or chapter 13 bankruptcies do not do handle chapter 11 cases and vice-versa.

Private Business Workout
A private workout is essentially a chapter 11 bankruptcy without filing chapter 11 bankruptcy. A private workout is a negotiation between the business entity and its creditors. The ultimate outcome is only limited by the resources of the underlying business and the creativity of the participants. Private workouts culminate in a workout agreement that all parties sign and a general restructuring of the debt.

The main challenge with a private workout is getting all the creditors to participate and agree on a solution. A private workout usually involves re-prioritizing debt, new priority and secondary liens on business assets, and giving over some ownership interest in the business to certain creditors.
Private workouts are best for relatively stable and established companies.

Business Entity Flip
I am always reluctant to discuss this option on the internet because the simplicity of the description does nothing to convey the risk and complexity of actually doing a successful business flip; but here goes. A business flip involves shutting down the existing business entity (LLC, Corporation, etc.), creating a new business entity or operating a sole proprietor, and having that new entity or individual buy the assets of the old business entity.
The main benefit of having a business entity is the legal separation of the owners from the entity. This allows the corporation to incur debt in its name. However, for many small businesses, lenders require the owners to personally guarantee business debt so the benefit of having a separate entity is often lost in that regard. However, when a business fails (or shuts down), the only thing left are the assets. Thus, the most a creditor can hope to get from a closed business is the value of its assets. In a business flip, the owners shut down the business entity, sell the assets (to a newly created entity), and start a different operation. If done properly, the creditors have received what they would have if the business failed—the value of the assets.

However, I must stress that this option should not be done without the assistance of a qualified attorney. If done improperly, the creditors can sue the owners of the old business and hold the new business entity liable for the debt of the old entity.

When done correctly, a business flip is my preferred option for small business debt resolution. It rescues the business from imminent failure, stabilizes the businesses expense structure, and is usually the most cost effective of all options. However, a business flip takes resources; the owners must find the resources to buy the assets of the old company to make this strategy work.

Finally, a business flip is my preferred option when the business has unpaid employment withholding taxes. A business flip sticks the penalties and interest to the old company. Granted, the owners will be personally responsible (the Trust Fund Recovery Penalty) for the difference, but getting rid of the penalties and interest can save tens of thousands of dollars.

Business Debt Settlement
As with any debt, it is at least possible to negotiate a settlement; that is, a lump sum cash payment below the amount needed to pay the debt in full. However, this option is risky for operating businesses as it typically requires the business to default on its debt obligations and business creditors tend to sue more quickly than consumer creditors. Also, there is the challenge to raise the needed funds to settle; the irony with debt settlement, if you have the funds to settle, you probably wouldn’t need to settle in the first place.

Options for Owner Exit Strategy

Often time’s businesses fail. If your business is no longer viable, it is time to start thinking about how you can exit the business with minimal financial consequences. To do so, the owner should orderly wrap-up the business affairs. By wrapping up the business affairs properly, the owner minimizes risk of creditors suing the owners. Thus, I always advocate for an orderly shutdown of the business entity.

Business shut down with owner bankruptcy
When a business folds, it usually dies on the vine of its own accord; there is nothing the owner does except close the doors and let legal nature takes it course. The landlord or secured creditors will seize and sell any business assets, and the business will simply stop. However, the owner still needs to deal with the financial consequences. Lenders typically require small business owners to personally guarantee business debt, so once the business fails, the lenders will pursue the owners personally.

The usual option for the owner is to file bankruptcy, typically chapter 7 bankruptcy. Chapter 7 bankruptcy will eliminate (discharge) the personally guaranteed business debt along with any other personal debts. The chapter 7 bankruptcy allows the owners a clean break from the failed business.

Business asset sale and shut down
Depending on the type of business and the particular circumstances, a business sale or flip can help minimize the remaining debt for which the owner would remain responsible. If there is a combination of personally guaranteed and non-personally guaranteed debt, if bankruptcy doesn’t make sense for the owner, and the personally guaranteed debt is manageable, it can be useful to sell the assets of the business to clear the books and properly shut down the business to minimize risk to the owner of any creditors continuing to pursue the business and owner for the debt. The idea, generally, is to kill that debt which can be killed by closing the business.

The only downside to this option is that the owner will still be responsible for any personally guaranteed business debt and then must resolve that debt through either settlement or payment plan.

Business Chapter 7 Bankruptcy
A business entity can file chapter 7 bankruptcy. However, most of the time, it is not necessary because in most cases the owner, with the assistance of an accountant or attorney, can manage the proper shutting down of the business entity. When a business files chapter 7 bankruptcy, the result is the owner turns over the business to the bankruptcy trustee to orderly wrap-up the business. The bankruptcy trustee will sell the business assets, go after any outstanding accounts receivables, distribute any funds to creditors and otherwise shut down the business. It must be noted, a business entity does not receive a chapter 7 discharge, the business simply stops operating and is liquidated.
When does it make sense to file a business chapter 7? There are 2 scenarios.

1. The business owner is either incapacitated or the business is complex and the owner does not want the hassle and risk of closing the business himself. For example, if the business has many types of debt (e.g. lines of credit, employment taxes, sales taxes, defaulted leases, secured debt etc), it might be easier, less risky, and more cost effective to simply file business chapter 7 bankruptcy and let the business shut down become the bankruptcy trustee’s headache.

2. If the business is in an industry with, or has, a high litigation risk a chapter 7 bankruptcy is useful. Even when a company is shut down, it can still be sued. The bankruptcy forces potentially litigants to come out of the wood work; if they don’t, then often times, their claims may be barred. You might be asking; why would I want to do that? Keep in mind, the goal is to provide an exit strategy and bring certainty to your circumstances. A business chapter 7 bankruptcy can put a layer (although not impenetrable layer) of protection between the owner and business creditors and litigants.

However, if the owner has personally guaranteed business debts, the lender may still pursue the owner for those personally guaranteed debts notwithstanding the business chapter 7. As a result, in cases with large amounts of personally guaranteed business debt and high litigation risk, both the business entity and the owner will need to file bankruptcy.

Have Questions About Any Of This; Check Out My Blog. You May Ask A Question Here.

Contact Denver bankruptcy attorney, Matt Berkus today by calling 720-545-0339 to discuss small business debt solutions available to you.