Escaping Small Business Debt

Saturday, November 15, 2003

Samuel Fromartz, http://www.fromartz.com

WASHINGTON (Reuters) - Small business owners describe the situation as a kind of hell: deep in debt, behind on payments and afraid to pick up the phone because they fear there is a collection agent on the line.

For John Ross, the former owner of a steel business in Roselle, New Jersey, the worst moment came when collection companies started calling his home.

"It really started to freak out my wife and kids," he said. "Life became a living hell and there was no relief."

Other business owners, who would rather not be named because of the stigma of being a bad debtor, describe similar experiences.

Ross said the pressure was so intense he began juggling payments on one debt or another and then forgetting all the details of what he had done -- as the calls kept pouring in.

The thing was, his business, with $4 million in revenue, was sound.

But a combination of events -- rapid growth, the breakdown of a key steel furnace that cost $1 million to replace, the loss of a big customer, and the actions of a secured lender, who factored, or sold, his future revenues -- set the company spinning out of control.

His business, Ironbound Heat Treating Co., could have filed for Chapter 11 under the U.S. bankruptcy code and reorganized the debt, but Ross took another route instead.

He called Commercial Credit Counseling Services Inc., based in Paramus, New Jersey, and they worked out a plan to renegotiate his debt outside of the costly bankruptcy court process.

Jerry Silberman, chief executive of Commercial Credit, said small businesses often don't have the resources to go through bankruptcy court and just end up closing their doors, to the detriment of themselves, their employees and their creditors.

Their debts are usually a combination of bank loans, credit cards, money owed to suppliers, and leases, some of which they personally guarantee.

Commercial Credit tries to keep the struggling company in business by working out a plan to reduce the commercial debt. Sometimes these small companies have debts of just $15,000, but it is enough to drive them to insolvency.

"They have one foot in the grave but these are not dead beats," Silberman said. "They have serious and legitimate problems and they don't have a solution."

Silberman offers them one by renegotiating the debts. His 5-year-old company currently manages the debt of about 1,500 companies.

He said that creditors will often settle for less than the full amount they are owed if they can be paid right away. If they want to be repaid in full, they must agree to a longer repayment period.

Why would a creditor agree to this?

"In bankruptcy, we usually get nothing or just pennies on the dollar," explained John Milek, general counsel at Fastenall Co., in Winona, Minnesota, which sells fasteners to construction companies.

He has worked with Commercial Credit in a couple of instances, where Fastenall's customers have gotten into trouble with debt.

He said it was preferable to keep the business alive, and get an agreed upon payment, rather than drive it into court where the result was uncertain.

Working with Commercial Credit, the debtor agrees to a monthly repayment plan, usually 2 percent to 3 percent of the principle, to settle the debt. If they owe, say, $100,000, their monthly payments could be $2,500, or 2.5 percent of the total.

The debtors pledge their assets to Commercial Credit, meaning if they fail to make payments under the plan, their remaining assets could be seized. This measure discourages creditors from going after the debtor, since they will then have a fight with Commercial Credit.

Silberman said Commercial Credit has only laid claim to the assets of one company who dropped out of the program, because in that case, the company was sold.

It usually takes 25 to 40 months to complete the plan and about 8 percent of its clients drop out each month. The company declined to say what total percentage completed the program, but it provided contacts of those who did.

Silberman said Commercial Credit makes its money by taking 30 percent of what it saves the debtor.

If, for example, a $100,000 debt is cut through negotiation to $50,000, Commercial Credit will get 30 percent of the $50,000 that was saved, or $15,000.

The total cost to the debtor, in this hypothetical example, would be $65,0000 to settle the original $100,000 debt.

One debtor, who did not want to be identified, said he was at first skeptical of the plan so took it to a bankruptcy lawyer, who said it looked sound.

He went ahead because it offered a way to settle the debts without the stigma and the cost of a Chapter 11 bankruptcy filing.

"It was under the radar," he said. "No one except the creditors knew and this was important because I did not want customers walking away."

In Ross's case, he worked out a plan to repay his debt and had the good fortune of selling his company. The debts were all settled under the terms of the plan.

"It gives you life and gives you hope," he said. "Or at least reduces what is owed."

(Samuel Fromartz writes about entrepreneurs and emerging companies from Washington, D.C., and welcomes stories about young companies. He can be reached at http://www.fromartz.com. Any opinions here are his own.)

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