How do I restructure my small business debts?
Owning a small business can be very rewarding, but it can also be very difficult. An estimated 100,000 small businesses close each year in Canada. When a small business faces financial struggles, the biggest question for the business owner is, “How can I restructure the debts?”
There are a number of factors to consider when deciding how best to restructure the debts of a struggling small business. These factors would include:
The total debts of the business.
Who the debts are owed to (e.g. Canada Revenue Agency (“CRA”), a secured creditor such as a bank, suppliers, landlords, etc.)
The value of assets of the business and whether those assets are secured.
The ability of the company to obtain affordable financing to deal with their debts.
The willingness of the small business owner to put more money into the company.
The willingness or the ability of the small business owner to invest the time needed keep the business running.
If paying the debts of the company in full on the payments terms that the creditors want is not an option, then the business has the following 3 options for restructuring the debts.
Informal settlement with creditors
One option for restructuring the debts of a business and to avoid a small business bankruptcy is to negotiate a settlement with the creditors on an informal basis. In order for the informal settlement to work, the payments to the creditors must be affordable and the creditors must agree to allow the struggling small business to pay less then the full amount of the debts and/or pay the debts over an extended period of time.
This option only works when there is a very small number of creditors and when the small business owner has a good relationship with the creditors. The business owner also needs to feel comfortable negotiating the payment plan and needs to understand what the company can afford to ensure they don’t agree to pay more then the cash flow will allow.
One of the problems with this option is that it requires all the creditors to agree for it to be effective. If even one creditor does not agree to reduce the debt and/or agree to an affordable payment arrangement, then plan will not work.
Another problem is that an informal settlement does not provide protection from creditors. If they want, a creditor can take legal action against the small business. In addition, CRA does not have the legal authority to accept less then the full amount they are owed in an informal settlement.
A formal proposal to creditors
Another option for avoiding a small business bankruptcy while restructuring the debts is for the company to file a formal proposal to creditors. A proposal allows the small business to negotiate a new payment arrangement with the creditors which will result in the company paying less then the full amount they owe and/or stretch the payments over an extended period of time. Most proposals result in the small business paying only a portion of their total debts. In addition CRA has the legal authority to accept less then what they are owed if the small business files a formal proposal.
Unlike an informal settlement, a proposal does not require all the creditors to accept the offer, once the required majority of creditors accept the proposal, it is legally binding on all creditors. In addition, a proposal provides full legal protection from creditors. Once a proposal is filed by a small business, all legal action is stopped and creditors are prevented from starting a new legal action.
A proposal can only be filed with a Licensed Insolvency Trustee like Farber.
Small business bankruptcy
If the small business owner feels that the business is no longer viable or if they don’t have the personal energy to continue running the business, then a small business bankruptcy is the best way to wind up the business and eliminate the debts.
As part of a small business bankruptcy, the company receives protection from creditors. All legal action is stopped and creditors are prevented from starting a new legal action.
A small business bankruptcy can only be filed with a Licensed Insolvency Trustee like Farber.
For more information about a formal proposal or small business bankruptcy, contact Farber.