Question: Can you afford to pay your creditors 30% of what you are paying now and stay in business?
From my experience, the answer would be either a confident “yes”, a less confident “yes…if I make changes” or “No”. If the answer was “yes”, restructuring may have saved the bakery.
Let me explain, starting with what can be gleaned from the article. The Article describes what happened to a super popular Bakery in Manhattan.
It states there was $600,000 in debt and that some was high interest [about $75,0000].
It also noted that public records showed other filings, [likely UCC filings], up to a year ago. So, I suspect there were other “advances” or even multiple advances running at the same time costing them the “significant” amount of revenue, [as mentioned in the article].
It would then be reasonable to say they were spending at least $50,000 a month [or much more] to support the $600,000.
Here is why I say that:
On just one $75,000 note, they were paying $700 a day to pay back a total $105,000. Using a standard 22 business days in a month to calculate, that alone is $15,400 a month for 6.8 months.
Side note: On the surface this looks like a 40% loan [75k paying back 105k] but since it’s over 6.8 months and not 12, the equivalent yearly APR would be 70% . This type of money is expensive because it is high risk with a high default rate [15%], often with a starting cost of 8-10% to the Funder/Advance Company themselves.
Ok, here is how this restructuring might work:
Let’s assume they are paying $50,000 a month and we create a restructuring funding at $15,000 a month [ remember, they believed they could afford 30% of $50,000].
This the cash-flow to fund the restructuring:
In 3 months, there would be $45,000 for creditors. Over 18 months, there would be $270,000 available. In 28 months, $420,000 would have been made available to creditors. And $420,000 is what our average stats. and predictive model suggest would be needed to satisfy all creditors, including the restructuring firm’s fee. If it takes more than $420,000, the restructuring just takes longer, if it takes less, the restructuring is shorter and that is because the creditors have a say in how much they get paid.
You might next ask: Why would creditors agree with a plan and not go it on their own? Compare that to what happened. The business is dead and there’s a pile on.
When situational factors are honestly explained and a credible plan is presented, it begins to look reasonable to creditors.
For this to work, creditors have to get paid. And they must be offered a payback that includes a 100% option. After all, they lent the money and they deserve to be paid back. A 100% option takes the most time though, so many will opt for less money over a shorter period. But some creditors are already willing to take less in these situations. In example, if they send it to a collection agency, the agency will take a fee from 10-25%. That’s being willing to take less.
Creditors also have different issues and priorities and that’s why they need many options. For instance, a publicly traded Funder may be looking at numbers for Wall Street 3 or 6 months down the line and base decisions upon that. Traditional banks often look for the most they can get in 12 months to comply with regulations and future categorization of the write-off. The SBA just wants 100% back and is generally willing to grant a forbearance and tack it on the end. And a friendly vendor that wants to keep a customer, may be happy just to get back their cost and go forward C.O.D.
Restructuring is getting all the parties to agree based on a realistic cash-flow plan. There is no magic bullet. There is pain.
But the pay-off is saving the business and its employees. Sometimes though, bankruptcy is the only option, which may be the case for those who answer “no” to the first question posed, because you not only need conviction but a fundamentally sound business for the restructuring to succeed.
I’ve simplified things for the sake of a post here but we’ve restructured 13,000 businesses in 22 years, so that’s what this opinion is based on.
Thanks to Renée Johnson of Main Street Alliance for posting and full credit to Rachel Holliday Smith and Josefa Velasquez of The City for a well written article. And though the article is from the Fall, it is very pertinent today.