Business Debt Negotiations and Settlements

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Business Debt Lawyers – Attorneys Settle Business Debts and Reduce Business Obligations through Negotiated Agreements

Goals of Business Debt and Business Expense Negotiations –

The ultimate goals of business debt and expense negotiations can vary however the immediate goals are similar: to expend less financial resources toward’s the businesses operations. These immediate goal can be accomplished through agreements with creditors to pay less or have more time to pay debts and/or obligations. Payment terms can be improved by decreasing or eliminating interest, reducing principal, differing or forgiving arrears, enlarging the period of repayment and/or lowering monthly payments towards the business debt installments. The ultimate goals may be reorganize the business during an economic downturn, to scale down scale down the business with the goal of closing it, and/or to find ways to address particular problem debt. Whether what’s sought is a reorganization and reworking of the business or a focused negotiations for an otherwise healthy business or a way to safely reduce business obligations with a goal of closing in an organized fashion, business debt negotiations seek to either reorganize, reduce, and/or eliminate business debt.

Scaling Down Business Obligations: Negotiating Business Debt and Expenses –

Where the goal of business debt negotiations is to scale down regular business expenses, as well as business debt in order to keep the business intact with a small scale of monies going out when there is less money coming in. This is especially true if the health, future and potential survival of the business is in question. The question is the degree to which there needs to be a scale down. The answer is that unless the business is being supported by incoming loans and other financial support, the business will need to survive on its accounts receivable (and monies on hand) which is essentially dictating that the outgoing expenses and debt servicing be supported by the incoming finances. Businesses when they start typically under perform and need loans and cash infusions to start. Similarly, when businesses are going through a hardship or a growth phase they will also often need such support. However the goal with all business endeavors is to make them profitable or at least self sustaining, and therefore Most debts and most expenses can be negotiated, especially at a time the business itself and/or the economy are experiencing hardship (ie, during the Covid-19 pandemic and consequent business lockdowns and economic slow down).

The Differences with the terms Business “Debt”, Business “Expenses”, Business “Obligations” and Business “Overhead”-

A business has many outgoing monetary items. The terms and characteristics for these vary and often can cause confusion through loose use of these terms. These terms include: “Business Debt”, Business “Expenses”, Business “Obligations”, Business “Overhead”, Business “Outflow” etc. Because here we need to concentrate on different ways to negotiate different debts, we will try to be more precise with these terms and will define them for the purposes of this web page as follows:

1. Business “Debt” – Business Debt can be formal loans like business loans, personal loans and secured loans against equipment. However the term debt can also refer to past due obligations like expenses that have accumulated and have now turned into debt. An example of a business debt that is short term are credit cards used in a business that creates short term debt; if that short term debt is being paid timely the business and its creditors may not need to negotiate. However, if the business cash flow is strained, short term debt like credit cards payments can be negotiated. Business Expenses like a lease expense can also turn into “debts” if they are past due for a considerable amount of time and start to accumulate.
2. Business “Expenses” – Business Expenses can be regular outflow items like rent, lease charges, phone bills, internet charges and/or utilities. The type of contract and vendor used for these services may determine how they approach efforts to negotiate their expenses. But Business Expenses can also be less regular outflow items like computer consultant fees, marketing expenses, and accountant charges. These less regular business expenses are often directly with a small business vendor or contractor and are often very negotiable when a business is undergoing strains and needs to scale down. Harder business expenses to negotiate are payroll especially for lower wage employees; however if a business is going through crises the rate paid and time/hours used for the employee can be negotiable items.
3. Business “Obligations”, Business “Overhead”, Business “Outflow” – Business Obligations, Overhead and Outflow are terms that broadly include both Business “Debt” AND Business “Expenses”. The broadest term in this group is Business Obligations which is any kind of financial requirement or liability for payment. The terms Business Overhead and Outflow refer to the regular outgoing cashflow of the business both for debt and expenses.

What Are the “Essential Elements” Involved in Negotiating Business Obligations? –

The “Essential Elements” in negotiating debt are usually put into a written and signed contract or a lease or could also be oral arrangements or could be customary terms in an industry that that are understood by all parties. Often a creditor may be more flexible with some elements than others; for example an element like the total amount of the debt may be inflexible to a creditor, but the same creditor may be much more flexible with the time to pay the debt and the interest rate, essentially giving the debt much better terms for repayment Once we determine which elements are “Anchor Elements”(inflexible terms) and which are “Softer Elements”(subject to some negotiation) and which are “Fluid Elements” (subject to a great deal of flexibility) we can know how to negotiate with a creditor.

These Essential Elements in negotiating debts or expenses are as follows:

1. Amount – The total amount of the debt;
2. Installments – The amount of regular installments;
3. Timing – The timing of the debt payment;
4. Interest – The amount of interest to be paid on the regular installments;
5. Default/Lateness – The terms or amount due or consequences if the debt is not paid timely;
6. Exchange – The quantity, quality and timing of products and services that are being paid for with the debt/expenses;
7. Rate – How the products and services are being charged;
8. Exclusivity – Whether the parties are free to contract with others for the same or similar product or services;
9. Term of the Contract – The length of the obligation and how and whether it is extended;
10. Personal or Cross Guarantees – Whether the business principals are personally liable for the business debt or made another business a guarantor;
11. Security – Whether the debt is collateralized in assets like real estate, equipment, vehicles, inventory and/or cash receivables.
12. Exit – How and under what terms can a party exit the agreement?

What Can Be Negotiated with Business Debt and Expenses? –

The question is often how and what to negotiate with business debt and expenses and the answers are often situational and depend on what is needed by the business and what is potentially acceptable for the creditor to negotiate. Below are ways to negotiate debts and expenses that are possibilities but which are are case by case specific:

1. Time to Pay the Debt – Often if the creditor is not flexible with the amount of the debt, they may be more flexible with the amount of time to pay the debt. Consequently the regular installment payments on the debt would be reduced. Often when a business is in a cash flow crunch reducing the monthly overhead is key to survival and such an agreement would not necessarily be threatening for a creditor, especially when confronted with worse alternatives (the business, due to it’s hardship, not being able to pay at all).
2. A Reduced Regular Payment or Payoff – In other situations a creditor may be open to the amount being paid being reduced especially when what is paid is paid either on time or sooner. To maintain regular payments a creditor may reduce the payments or to get a complete payoff of the debt they may drastically reduce the debt.
3. Better Terms as to Interest and Other Charges – With some debts, like credit cards, the amount of interest paid on the debt can be very central to the amount paid by the business on an ongoing basis and in total.
4. Reducing the Services or Product for a Lower Payment – Sometimes the creditor has the flexibility to change agreements if the customer is agreeing to receive less in services or product.
5. Increasing Services or Product for the Same Payment – Sometimes the creditor is unwilling to reduce its payment, but is more flexible on delivering more services or product for the same fee.
6. Mitigating or Eliminating Harsh Default Terms – Sometimes during periods of business crisis it becomes clear that harsh default and/or late payment terms are unrealistic and need to be renegotiated by mitigating or eliminating them.
7. Negotiating a Better Rate – The rate by which creditor charges, can often be renegotiated on a going forward basis in a changing economic environment. Services charged on an hourly or by task basis and/or product charged on a quantity and quality basis can all be renegotiated especially where the underlying premises for the previous agreements have changed.
8. Reducing or Mitigating Guarantees or Collateral – The guarantees or security given for a loan may be an important term to negotiate especially where there is economic uncertainty. The creditor in exchange for actual payments may loosen up guarantees or security going forward, especially in a changing environment where certain obligations may become unrealistic or uncompetitive. For example, “good guy” clause in the personal guarantee of a lease can be negotiated to limit the business owner’s personal risk if the business is unable to keep up with its lease obligations.
9. Negotiating the Duration of the Agreement – The length of an agreement with a creditor can be renegotiated. Often the creditor may be flexible to reducing payments if an agreement is expanded in terms of duration. The opposite is also true where payments are accelerated or at least kept the same in a deteriorating environment the creditor may be open to reducing the duration of the agreement.
10. Negotiating Exit Terms – Sometimes where the situation is dire exit terms out of an agreement need to be negotiated and the changing environment may influence whether the creditor may seek compensatory terms an earlier exit or whether the business can assert that maintaining the same remuneration in a harsher environment is sufficient to warrant ending the agreement earlier.

Which Business Debts Can Be Negotiated ?-

All business debts can be negotiated as to their terms. Each type of business debt or obligations has terms as to amounts due, time given to pay, interest, additional payments, security or guarantees given to assure payment and other conditions. Generally all or most of such terms are negotiable. The types of business debts that can be negotiated are:

1. Secured debts – collateralized loans like mortgages, equipment financing, and/or vehicle loans.
2. Unsecured debts – un-collateralized loans like credit cards and/or personal loans.
3. Leases – leases for business offices, machinery (like copiers, phone systems, vehicles.
4. Taxes – obligations to federal, state and local governments like income, payroll, corporate sales taxes and real estate taxes.
5. Payroll – the actual compensation for employees and independent contractors.
6. Arrears on Expenses – arrears on expenses such as rent, utilities and other bills can be negotiated in terms of repayment terms.

Tools to Negotiate Business Debts –

In order to obtain concessions from creditors for business debt there need to be tools with which to negotiate or to motivate a creditor to give the borrower better terms. These tools can be positive motivators (“carrots”) like payments, security, guarantees OR negative motivators (“sticks”) like the threat of non-payment, bankruptcy and/or litigation. Usually before a negotiation starts an evaluation needs to be made as to what is being offered to the creditor to motivate them to give concessions. The business agreements (contracts, leases or other signed agreements) themselves are a place to start to see when and under what conditions can the debtor/borrower pause or stop making payments and/or seek resolution to a dispute in arrangements. Usually ambiguities in agreements or changed conditions can be used to support a position that favors the debtor/borrower.

Alternatives to Business Debt Negotiations –

Alternatives to Business Debt Negotiations are alternatives that are usually in the background of these types of discussions and are often taken into account in the party’s assessment of their respective bargaining positions. These alternatives may be pursued if negotiations do not work out and/or simultaneously with negotiations to pressure the other side into a better deal. The alternatives are as follows:

1. Litigation – Litigation in this business context is the use of the Courts to resolve financial arrangements and disputes. The business owner can wait for the creditor to initiate a suit or start the suit themselves. Often what the business owner may assert as a defense or counter-claim in a suit started by the creditor, could be asserted as a claim in a suit initiated by the business owner. There are several venues to pursue a suit: Supreme Court for most actions, Federal District Court for actions involving diversity jurisdiction or federal questions, Small Claims and Local District Courts for small amounts at stake, and Landlord-Tenant Court for matters concerning lease/rental situations. The advantages of litigation for the business owner is that litigation is generally slow and time consuming and expensive and therefore encourages negotiation by the creditor. The risk of litigation is that often it is a win/lose proposition and if the business owner at the end is found liable, not only can they be ordered to pay the original debt, but also additional costs like interest and/or attorney fees for the creditor, especially if the agreement with creditor provides such relief.
2. Mediation or Arbitration – Mediation or arbitration is an alternative dispute resolution tool that is available by choice of the parties or in the agreements binding the parties in the event of dispute. The question with mediation and arbitration is whether it is binding, which it generally needs to be to be able to resolve difficult disputes. The extent to which mediation or arbitration work depends to a large part on the mediator or arbitrator and how creatively and constructively they can get a difficult dialogue going between the parties and how they can get both sides to see a resolution that compromises the parties positions is in everyone’s favor. The advantages with mediation and/or arbitration is that it is cheap compared to litigation and is not usually a winner takes all forum. The disadvantage for the business owner in arbitration or mediation is that they are faster and more efficient and do not provide the kind of leverage toward negotiation that litigation does. Also mediation and arbitration like going to Court ultimately depend on the decision maker in the forum whether they be a mediator, arbitrator, judge or jury. Therefore there are risks in any forum.
3. Bankruptcy – There are several well used Chapters of the Bankruptcy Code, Chapters 7, 11 and 13. Only Chapters 7 and 11 apply to corporations and individuals (Chapter 13 is only available for individuals and therefore we will not discuss it on this webpage under the assumption that most businesses are corporations). Chapter 11 is widely used for businesses that are potentially viable business that may be healthy in the long run, but are temporarily suffering hardship that if not addressed constructively could harm and even end the business. Chapter 11 has many advantageous aspects that under a Chapter 11 plan that needs to be approved by the Bankruptcy Court and a debtor’s creditors, allow the business to change the terms of debt repayment by reducing the percentage of debt to be repaid and expanding the duration of payments for the business. Chapter 11 could give a business under the strain of difficult debt a breather during the case, since the automatic stay enacted upon the filing protects the business while it is in a weakened position and reorganizing. Chapter 11 under recent legislation has added provisions to make small business Chapter 11 cases more efficient, less expensive and run in a more efficient manner by an outside business person as trustee, rather than the U.S Trustee’s office which used to be in charge of all Chapter 11 cases, for small and large businesses. Bankruptcy is a real threat for many creditors since the dynamic drastically changes in a situation when the creditor realizes that they can not quickly get their way. Creditors that seemed intractable before a bankruptcy case often soften their positions when they see that the Bankruptcy Court is giving the business a reasonable chance to reorganize and is trying to accommodate all the parties in the “debtor’s estate” which includes all the creditors and the business. Besides Chapter 11, Chapter 7 is also a possibility for businesses where the business owner wants to close and eliminate the possibility of future suits by showing the court and creditors that it is liquidating all assets and disclosing all income sources. More often, Chapter 7 is a good option, if possible, not for the business corporation, but for the business owner as an individual for personal guarantees and potential individual liability for business related issues that others try to hold the business owner liable personally.
4. Just Closing the Business and/or Dissolving the Corporation – The question that is often asked by business owners, is can I just close the business without any legal complications? Or if I dissolve the corporation that forms the business corporation, do all the problems go away? The answer is that in most cases many issues remain and could look to the business owner personally for resolution. Not only do personal guarantees remain and need to be resolved even after a business closes without the assistance of the corporate entity’s income, but collateralized assets for secured business debt, whether they belonged to the business or others are still secured and could be pursued to pay for the debt. Also certain debt like certain debts like certain taxes: sales taxes, payroll taxes are inherently debts where the principals of the business are held liable. Finally certain allegations of wrongdoing while controlling a corporation may become personal debts. Therefore, just closing the business and/or dissolving the corporation is not in every case advisable and it is sometimes better to keep the corporate veil in place until all or most of the debts and obligations of the corporation have been either resolved or determined not to be debts that could pursue the principals of the business personally. However, once that determination occurs, and the larger, known debts of the corporation have been either resolved or are certain not to pursue the principals, it makes sense to close the business and/or dissolve the corporation by filing final tax returns once a representation can be made that the corporations taxes have been paid in full.

Why Use Our Office to Negotiate Business Obligations –

Our office has strong negotiation capabilities in seeking a broad array of possible negotiated outcomes. However what gives us more leverage than the average business person or attorney, even if they are a savvy negotiator is the leverage that we have by impliedly or sometime vocally showing creditors that the business and business owner have alternatives in terms of litigation and bankruptcy options and some “good cards to play” that we can leverage to get the business owner a better negotiated deal.

How We can Help You Negotiate Business Debt and Business Expenses –

We start out by meeting with you and understanding your facts, goals and challenges. The initial consultation will lay out alternatives and options in what may be a complex and difficult situation. If you decide to use our services we will then do an intake for get more detail and documents form you in order to pursue your negotiated business debt matter. If you do retain us, we will enter into a retainer agreement that will clearly lay out the terms of our retention.

Please contact us for a free legal consultation regarding negotiating business debt and other other business obligations at 631-271-3737.

Our Consultations are Free, but Our Legal Advice May be Invaluable.