Even closely held firms which have grown despite these challenges are likely feeling a heavier debt burden now. Many business owners rely on credit cards or mortgage loans--increasingly ones with variable rates--to launch or expand their operations.
Highland Park, IL (PRWEB) March 14, 2007
Now more than ever, debt is a double-edged sword for closely held companies, and requires special attention, according to the president of a leading commercial-debt settlement firm.
Jim Herst, founder and president of Performance Source Inc (PSI) notes that a host of outside pressures is making it more difficult for small businesses to maintain the steady cash flow needed to keep their debts under control. Faced with these challenges, it's no wonder more of them are seeking outside help to manage their debts.
Running Your Business Isn't Getting Easier
Herst cites several current factors which are making it harder for private companies to manage their debts:
- In February, 4th-quarter 2006 GDP growth was revised downward--from an initial estimate of 3.5% to a far weaker 2.2%. It was the largest downward revision in the GDP in a decade. The lower growth rate suggests that more businesses are seeing reduced demand for their goods and services, hampering their ability to pay their debts.
- Raw material costs are rising. Higher gasoline prices are only part of the story. Industry Week magazine reports that copper prices have doubled in the past year, nickel prices are on the rise, and other material costs are as volatile as they have ever been. In response, manufacturers who buy these materials are raising their prices . . . which cuts into the cash flow of the firms who buy their products.
- The U.S. economy is increasingly sensitive to global economic news. On February 27 China's Shanghai Composite market dropped 8.8%, immediately triggering significant declines in both U.S. and foreign markets. It was another example of how fast global economic news can hit the stock investments that closely held companies rely on for a variety of needs--indirectly reducing their ability to make debt payments.
- Competition, both big and small. In his book "The Wal-Mart Effect," author Charles Fishman says, "Wal-Mart's . . . low prices routinely reset our expectations about what all kinds of things should cost--from clothing to furniture to fresh fish." At the same time, tiny, low-cost online merchants have made nearly every category of consumer and business goods more competitive than ever.
As PSI's Herst points out, "Even closely held firms which have grown despite these challenges are likely feeling a heavier debt burden now. Many business owners rely on credit cards or mortgage loans--increasingly ones with variable rates--to launch or expand their operations." Besides being more costly to use as interest rates have risen, many credit cards' minimum payments have recently jumped to 3 or 4% (from the typical 1.5%) of the outstanding balance.
Options for the Business In Debt
What can a private-business owner do if his (or her) company's debt load has become a problem?
Herst notes that most owners prefer to try to 'ride out' the rough patch. "Unfortunately this approach often makes the situation worse," he says. "Consolidating the debts with a new loan is another option, but in most cases the owner will have to put up collateral such as a home or major assets of the business. Plus, the long-term cost of the consolidation is often greater than what is currently owed on the debts.
"Bankruptcy is a third way to go but not as attractive as it used to be: The 2005 Consumer Bankruptcy Reform Act has unintentionally made it harder for small businesses to wipe away debts. Even when a credit card is opened in the name of a business, the card's terms and conditions are likely to say that the person opening the account is responsible for the debt."
What About Debt Settlement?
As a result, Herst explains, more business owners are looking for a better solution--and discovering debt settlement. If an experienced, professional negotiator is hired to deal with each creditor individually, he says, some of the business' debts could shrink by as much as 70%. He advises business owners to look for an experienced pro who will also handle all calls and letters from their creditors--allowing the owner to focus on rebuilding sales.
"A key question that any business owner should ask a debt-settlement firm is how it earns and collects its fees. Ideally, the fees should be based solely on the dollar amount of debt savings achieved for the client. This makes debt settlement a virtually risk-free solution."
That's not to say that debt settlement is perfect, or appropriate for all companies' financial situations, Herst acknowledges. It's primarily intended for companies already behind on their payments and looking to make a fresh start. Because they are "in arrears" on their debts, these firms' Dun & Bradstreet ratings usually have already dropped. Debt settlement activity may initially lower these ratings further, but in most cases it is also the first step in rebuilding the client's rating--because payments are now being made where they weren't before.
Herst concludes, "If your company is dealing with heavy debt, you're not alone. Many companies are struggling against economic conditions beyond their control. But don't assume your debt problem will take care of itself. While debt consolidation or bankruptcy might seem like the most obvious options, remember that debt settlement could get your business back on track financially with far less cost and stress to you."