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Business Advice

Financial Recovery: Negotiating Payment Plans With Creditors

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Financial challenges can sometimes lead to strained relationships with creditors.

As a company director facing financial difficulties, negotiating a payment plan with creditors can be crucial to stabilising your business.

The people you owe money to (your creditors) have a right to get it back. But their goal is to get as much of your money as soon as possible. Therefore, you have the means to negotiate a mutually beneficial agreement that allows you to continue trading and increase their chance of recovering the debt.

However, falling behind on other bills in order to pay off this debt could cause more problems.

This guide is designed to provide Australian business owners with a step-by-step approach to negotiating payment plans, offering a lifeline to those grappling with financial stress.

Step 1. Assess your financial situation

Before initiating any negotiations, it’s essential to have a comprehensive understanding of your company’s financial standing.

Prepare detailed financial statements, including income statements, balance sheets, and cash flow projections. Projections are to show when the creditor can realistically be repaid according to your circumstances.

For your convenience, Clout Advisory has prepared a template to help you create a cash flow projection for your business for the next 12 months. Download your copy of a small business’ cash flow forecasting and projection template.

Demonstrating to your creditor that you know exactly how much is owed, when you expect the inflow of cash will occur and how you can repay them instils confidence in their ability to receive their debt.

Step 2. Open communication lines

Initiate open and honest communication with your creditors.

Many creditors may be willing to work with you if they know your challenges. You can schedule a meeting or send a formal letter explaining your financial difficulties and expressing your commitment to finding a mutually beneficial solution.

As with many negotiations, persistence is critical. However, put yourself in the shoes of your creditors. Try to understand what concerns they might have. You can prepare the most accurate answers by preemptively anticipating their questions about why your business is facing financial challenges.

Furthermore, include what steps you are taking to address them moving forward. Demonstrating a proactive approach can persuade them to trust your commitment to resolving the situation.

Step 3. Propose a realistic payment plan

Craft a well-thought-out payment plan that reflects your company’s financial capabilities. Consider proposing reduced monthly payments, extended payment terms, or a combination.

Forbearance agreements create a period in which you do not have to make payments. Although interest will often continue to accrue during this time, a forbearance agreement will enable you to retain some cash and bolster your cash flow temporarily.

A long-term repayment plan typically lets you repay your debt with reduced or no interest.

You could ask for debt forgiveness. Consider starting the negotiation by offering to pay 25% or 30% of your outstanding balance in return for forgiveness on the rest.

A debt agreement is a legally binding agreement between you and your creditors. It can be a flexible way to settle debts without becoming bankrupt; however, there are limits to the amount of debt and income you can have to be eligible.

Whichever option you strategise, ensure the proposed plan is realistic and sustainable for your business. Substantiate the plan with the proper financial evidence collected in step 1. If you are able to show you historically made consecutive payments on time, you should be well-positioned to ask for leniency as you have proven reliability.

The plan should include all current financial obligations and, if possible, allow some leftover income to cover unexpected expenses and emergencies. The intention of a realistic goal is for your business to remain operating.

Furthermore, clearly articulate the benefits of the proposed payment plan to your creditors.

Emphasise how the plan aligns with your commitment to fulfilling financial obligations and how it sets the foundation for a long-term positive relationship. Highlighting the potential for future collaboration can make your proposal more appealing.

Keep in mind it is in the creditor’s best interest to get their money back, and if you cannot operate your business, there is a higher risk of them receiving nothing.

Step 4. Seek professional advice

If necessary, seek the assistance of financial advisors or legal professionals who specialise in debt restructuring. Their expertise can help you navigate complex negotiations and ensure that the proposed payment plan is legally sound and in the best interest of both parties.

Clout Advisory are leading insolvency accountants and specialist restructuring advisors with decades of experience working with SMEs in several industries.

Our team of Small Business Restructuring Specialists are dedicated to helping small businesses thrive. We understand small businesses’ unique challenges and have the expertise to provide tailored solutions to overcome them.

Step 5. Document the agreement

Once a mutually acceptable payment plan is reached, ensure the agreement is written. Clearly outline the terms and conditions, including payment amounts, due dates, and other relevant details. A written agreement provides clarity and serves as a reference point for both parties.

Step 6. Monitor and adjust

Regularly monitor your company’s financial performance and adhere to the agreed-upon payment plan. If unforeseen challenges arise, communicate promptly with your creditors and be open to adjusting the plan if necessary.

If you’re falling behind and unable to make your minimum monthly payment but have been a reliable borrower, contact your lender to see if they would consider reducing your interest rate or finding another way to make your loan more manageable.

Proactive communication demonstrates your commitment to honouring the agreement.

Financial recovery is possible with payment plans.

Navigating financial challenges as a company director can be daunting, but negotiating a payment plan with creditors is crucial to financial recovery.

By approaching the process with transparency, empathy, and a well-prepared proposal, you can build a foundation for a positive relationship with creditors and set your business on the path to stability.

Remember, seeking professional advice and maintaining open communication are essential to successful negotiations.

You must remedy the situation if you do not have contracts and a paper trail. Very few lawyers will accept a case without written evidence of the amount owed for the service or product provided.

If you have any questions or need further assistance, contact us.

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