Cash Crunch - What to do in tough times

There are three simple principles that a businessperson should think about in dealing with a short-term severe reduction in revenue: (1) Look hard at cash spending; (2) Hoard the cash you have; (3) Work with your creditors to restructure the debt.

For over a third of a century I have worked for several different financial institutions.  Though I had many different tasks at those companies, a very large part of my work involved negotiating with borrowers of the bank that were having difficulty paying their debts. From that time, I have tried to distill some of the basic principles that a business should think about when it suddenly has great difficulty paying its debts because incoming sales have severely been reduced. We at Vesha Law Firm can help a struggling business with these issues.

LOOK AT CASH SPENDING - When cash flow coming in has suddenly been slashed then the responsible manager/owner looks to immediately slash outgoing cash so that the business will survive. If you contact us at Vesha Law we can explain how other small businesses survived similar issues in the past. Perhaps you can use some of the same techniques.

HOARD THE CASH YOU HAVE  - Here the thought should be to look at the cash you have currently and incoming cash, and then keep track of it. Question every cash expense. If the expense is not absolutely necessary, then the answer should be a firm “NO”.  

If the commercial borrower has a commercial line of credit, then the borrower should seriously consider drawing on the line to its max. Then, the cash balance should be transferred to another financial institution. This is because in Ohio and most other states the bank has a right of setoff. Under this right the bank can setoff the cash from a depository account for any amount owed it. No lawsuit or notice needs to be given to the account holder. If the cash emergency passes, then the line can be paid back down and the interest expense and other issues with the draw can be eliminated. So, the business owner should think about moving all checking accounts to a bank that is different from where the loans are housed. Remember also that most owners of small businesses are signed personally on their loans, so they should move their personal checking accounts as well.

RESTRUCTURE YOUR DEBT – Most loans are term loans – that is a loan that will be paid off (in banker lingo, amortized) over a period of years. Usually the last payment will be at the end of the term. Many banks and other financial companies will have programs that allow the lender to make a reduced payment of some kind to skip a month or more.  

If the problem is more than a month or so, then you may want to enter some kind of restructuring arrangement with the bank on your term loan. The idea here is that you get reduced payments for a shorter period of time, say 6 months. Then, you catch the payments back up in say another six months. For these kinds of arrangements, the business owner should expect some restrictions that are not in their original loan agreements. We have drafted many of these kinds of restructure agreements (most banks refer to them as forbearance agreements) over the years and can explain to any of our clients why the bank is doing what it is doing and how to deal with the bank appropriately. This is an area where an experienced practitioner (like Vesha Law) should be hired. 

Jim Lewis, Esq.