Business Survival Series: Respect Your Creditors

But how can you establish and maintain a mutually respectful relationship through the trials and tribulations of business?

It’s helpful to start by clarifying intentions. 

Your creditors lent you the money (or provided goods and services) you needed, when you needed it. All they want is to be paid back. 

This needs to be clarified since many small business owners get lost thinking that creditors want their home, their business premise, their assets or more. But the reality is that creditors just want what they’re owed – cash. 

It’s not helpful to complain about the demands being made by your creditors. You are the one who agreed to the terms and until you accept that, you cannot do anything about changing the situation you find yourself in.

So how can you better respect your creditors?

Be transparent with your creditors.

Transparency is the most important factor. Don’t delay or conceal problems and hope that no one will come asking questions. You need to understand that your company is in the spotlight and creditors probably have a better understanding of what’s going on inside your business than you are giving them credit for. 

The old adage is true. The truth does always come out. 

Don’t wait and be left with a bunch of angry creditors who don’t trust you. Get out in front of your issues. Let your creditors know what is going on and how you plan to tackle the problem. If further problems arise down the track (and they always do) keep your creditors updated. Make a habit of being honest and transparent and your relationship with your creditors will be stronger. 

Next step: putting your commitment to transparency into action.

This can admittedly be difficult. To get yourself on your way to a more transparent relationship we suggest following Domenic Aversa’s advice:

Establish a weekly communication schedule with your creditors. It is possible that you may be talking with them daily because of your lending needs (borrowing base calculations, etc.). However, if you have your cash-flow projections updated weekly to measure budget vs. actual then you should have a meeting or call with the lender to update them at this point. Concurrently, you can have a running list of action items that you are working on to turn the business around, and you should update them weekly on these items as well. Most importantly, don’t avoid them. Bankers don’t like surprises; they can handle trouble. If they know of the problem, they will try to manage around that risk. Work with them.’

Domenic Aversa

This also applies to important suppliers.

Uphold your obligations to your creditors.

As far as you can, uphold your obligations to your creditors. The most obvious way to show a creditor that you have respect for them is to pay your debts on time and in full. The reality of operating a business means it is not always practicable to do this. However, this does not mean that some sort of middle ground cannot be reached. 

If you can’t pay and your position is hopeless you still have some options.

For individuals, the three primary options are as follows:

• Bankruptcy – the legal process by which a person is declared unable to pay their debts and subject to a discharge of their debts. 
• Personal insolvency agreement – a binding agreement between an indebted person and their creditors that will be set aside when the debtor has successfully fulfilled their obligations. 
• Debt agreement – a binding agreement between a debtor and their creditors where the debtor pays a set amount over a set period of time to settle larger debts that could not be paid because the entity owing did not have sufficient funds. 

For corporations, the following are available:

• May utilise the ‘safe harbour’ by engaging a restructuring adviser and developing a turnaround plan.
• Appoint a small business restructuring practitioner. 
• Appoint a voluntary administrator.
• Appoint a liquidator.
• Cease to trade and inform creditors whilst working on assessing the above options.

Circumstances will of course govern which option is best. But remember that just because you can’t pay back your debt right now, doesn’t mean the end of the world.  

Find a solution that is viable and get your creditors on board. And do it sooner rather than later. 

Do not engage in fraudulent behaviour against your creditors. 

This is an obvious component in respecting your creditors. Engaging in behaviour designed to fraudulently mislead or deceive your creditors is not only a complete undermining of the creditor-debtor relationship but it is illegal. 

A creditor-defeating disposition occurs when property is transferred for less than its reasonable market value. Dispositions of this nature have the effect of preventing, hindering or significantly delaying assets from becoming available to meet the demands of creditors. 

Whether done by an individual or a corporation, creditor-defeating dispositions are illegal and serious consequences apply, including both civil and criminal penalties. 

Under no circumstances should you engage in such activity. Not only will you certainly ruin the relationship with your creditor, but you open yourself up to liability before the court. 

It is simply not worth it. You can always start a new business again if your entire structure is insolvent (this is another blog post discussion).