According to figures from the U.S. Census, more than 200,000 small businesses shuttered their doors during 2008-2010. With those closings, 3 million jobs evaporated. A recent survey of small business owners showed that most were not optimistic about the economy yet they had a bright outlook on their own fortunes. This is to be expected since small business owners, as a group, are generally an optimistic lot. If not, why would they try. A survey by Deluxe Corporation, a company providing marketing support for small business, found that small business owners as a whole:
- Felt they can do what they set their minds to.
- Would rather learn from failure than not try.
- Think of themselves as leaders.
- Would rather not have a boss.
According to the Deluxe survey, there is a 50-70% failure rate for small businesses within the first 18 months. Inevitably, the problems of small business are precipitated by a lack of capital. This could be the capital to form the company or the cash flow that hopefully follows. Small business is exceptionally fluid. I would often tell business associates that large businesses could get a "mulligan", to use a golf term. If a large business had an instance where they hit the ball in the water, they could pull another one out of the bag and reload. An errant shot by the small business owner could mean game over.
One area where businesses tend to get in trouble is with debts that could lead to legal action.
According to Dun & Bradstreet in the next 60 minutes, 12 businesses will file for bankruptcy and another 317 will have suits, liens or judgments filed against them.
Areas where I have noticed small businesses in legal trouble include:
- Delinquent leases
- Issues with promissory notes
- Delinquent accounts - advertising
- Delinquent accounts - goods & services
If the business is small and in their formative stages, they may not have legal representation. Even if they were to retain legal counsel, that attorney will not provide services on a contingency basis. Now the burden of potential litigation makes this approach potentially quite costly and certainly distracting. The litigation can make for intractable attitudes during negotiations. A judge I know related that parties in a business-to-business litigation will typically not like the disposition of the court.
Fortunately, there is a better way. Business restructuring and debt mediation services can bring a small business debtor and creditor together to provide an equitable settlement. The business restructuring consultant represents the small business debtor either directly with the creditor or with the creditor attorney, if litigation is pursued. The restructuring consultant applies a broad-based view of the financial condition of the small business debtor, takes into account the totality of the various creditors who have taken or are contemplating legal action, assesses capital needs, and negotiates a settlement that is satisfactory for both parties.
I emphasize "satisfactory for both parties" since this outcome is beneficial for the small business debtor, who gets to keep their doors open and the creditor who at least has a solvent client with whom they can continue to do business if they choose. There are a number of events that may be completely outside of the small business owner's control that ultimately lead to bad debt. Remember what I said earlier; the small business owner does not get a mulligan. The business restructuring consultant allows the small business owner to be able to have another swing.
Jim Mosquera is a Principal at Sentinel Consulting, a business restructuring, debt mediation and capital acquisition firm. He is also the author of E$caping Oz: Protecting your wealth during the financial crisis.