In danger of defaulting? Why businesses should act quickly

In danger of defaulting? Why businesses should act quickly

Vijay Jainundh, Head of Paragon Debt Advisory

  • Don’t put your head in the sand; act quickly if you come into financial difficulty.
  • Defaulting negatively affects your credit rating, which makes securing funding in the future more difficult
  • Businesses who are close to going into the red need to be proactive and contact their funders
  • Being proactive and proving what you are doing to improve business cashflow and debt repayments counts in your favour

Businesses who may be teetering on the edge of meeting their monthly financial obligations, particularly their debt repayments, should not rest on their laurels. Acting as soon as possible to get your house in order and engaging with creditors is the best course of action. Here are some steps to take first:

Remain calm

It’s natural to panic when you are on the brink of defaulting but keeping a cool head and remaining rational will hold you in good stead. This will allow you to sensibly assess your current position and any means to improve liquidity to pay as much as you can towards your debt. When you default, it negatively impacts your credit rating, which can make current creditor relationships difficult, or it can have a negative impact on securing credit in the future. Therefore, it would also be best to avoid taking on new debt until you have remedied your current financial position.

Prepare for negotiations

Before reaching out to funders, preparation for the discussion will ease the negotiations and way forward. Businesses should record in writing a detailed and clear explanation of why they are expecting to experience cash flow difficulties. They then need to set out a proposed plan to navigate out of their expected distressed position and what concessions they require from funders, and very importantly how they intend to make up any shortfall payments or moratoriums.

This plan should include what austerity measures are being taken to share in the pain as well as to free up cash flow. For example, salary cuts would prove the business is being impacted by cashflow constraints – it’s not just the funder who will receive delayed repayments. This shows commitment to remedying the situation and maintaining funder trust and confidence.

Proactively engage with your funder

Funders do not like it when businesses avoidcontact and rather turn to business rescue practitioners to be ‘saved’. This is considered a hiding mechanism and naturally constrains the powers of the funder,placing full control of the situation in the hands of the practitioner. A funder would certainly strive to work with a business to find a solution instead.

To proactively avoid a default is always best.A lender may look to the courts to seek repayments otherwise, which can become an expensive exercise to recoup legal fees on top of the outstanding loan. Lenders, however,are not quick to resort to this option as it’s a lengthy process and working with a client to come to a resolution outside of involving the courts is almost always preferred.

There are options if you act fast, and there may be alternative funding solutions that can help to futureproof your business.

Seek third-party advice

This can become a daunting process for business owners who are already highly stressed by their current financial situation. Seeking assistance from an independent advisor to assist in management discussions and negotiations with funders on behalf of the business can alleviate unnecessary stress, shorten the resolution period, and secure you the best way forward.

Funders will also feel more confident when an independent advisor is in the middle managing the interests of both parties and ensuring that the plans are realistic and will be executed. An independent advisor acting for both partiescan generallysecure more flexibility around altering payment plans, waiving of covenants, debt restructuring or refinancing and any other process that needs to followto improve the solvency of the business.

Paragon Debt Advisory’s relationship with over 200 funders has proven to fast-track discussions and securefavourable outcomes for its clients.

Keep to your promise

Once a solution has been agreed upon between the business and funders, it’s important for the business to commit to successfully executing the plan and keeping funders updated on their progress. This will ensure that funder relationships are strengthened for future funding needs.