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Credit Risk Memos (CRM's)


For Small Business Debt and Repayment

Credit Awareness Tools & Insights


CRM #1 – Abundance of Caution


Creditors will take liens against, but not lend money for certain probable collateral (i.e., reserves, real estate, blanket lien on all assets, etc.) because of some type of uncertainty or its speculative nature. The inclusion as collateral is usually as an abundance of caution with little or no value assigned to it. In other words, for example, the real estate taken as collateral is not the reason or purpose for making the loan; therefore, the loan terms may be unlike those of a real estate loan with a lower interest rate and longer term or maturity. But there must be some value in the (real estate) collateral taken as an abundance of caution, and creditors are required to get appraisals or evaluations on certain real estate unless it can be shown that the real estate collateral taken was used only as an abundance of caution. The creditor would have to clearly document and verify that repayment sources (i.e., cash flow) were well supported other than relying on the real estate collateral, and no appraisal would be required by the creditor. The creditor will still secure its intended lien priority position, and insure the same with an ALTA title policy and hazard insurance. 




It’s possible your financial performance has declined, but is still acceptable. A creditor may very well wish to ‘secure’ your loans with additional collateral to protect its interests, and you may have, for example, real estate that could be pledged to as abundance of caution support for the creditor. You might save the cost of an appraisal if it can be shown that your primary repayment source is still sufficient.

CRM #1

CRM #5 – Bankruptcy


In bankruptcy, when a petition is filed, an ‘automatic stay’ prohibits creditors from taking any further action to collect on their debts. The stay will remain in place until the debtor’s assets are released from the estate, the bankruptcy case is dismissed, is discharged by the court, or the court approves lifting the stay. Debts owed to creditors are assigned to classes; the first class of creditors are priority creditors – they are to receive payment prior to other creditors. If there’s no equity in the debtor’s assets, the court is likely to terminate the automatic stay, allowing the creditors to seek repayment and liquidate collateral. 


A Trustee will be assigned to administer the affairs of the debtor’s estate. He will control the disposition of asset sales, payments, and ensure there are no preferential transfers to creditors (taking a security interest in an asset) who may have taken certain actions 90 days prior to a bankruptcy filing (or one year for an insider). Bankruptcy petitions are also either voluntary (filed by debtor) or involuntary (filed by creditors). Involuntary filings are filed where the debtor is considered to be insolvent, and where there’s an expectation the assets will be sold to repay creditors. While still under the bankruptcy petition, a debtor could ‘reaffirm’ certain debts with creditors and resume payment (i.e., a mortgage or auto loan). 


Chapter 7 Bankruptcy – A plan where the debtor’s assets will be liquidated; it involves a trustee who will sell nonexempt property and utilize the cash proceeds for payment among  the debtor’s creditors. Once the debtor is ‘discharged’ he is no longer legally responsible, or liable for the debts listed at the time of the bankruptcy petition was filed with the court.  Consumers and businesses both file Chapter 7 petitions; it’s possible their other chapter petition filings to restructure their debts will be converted to a Chapter 7 filing for non-payment.


Chapter 11 Bankruptcy – A plan that is intended not for liquidating assets, but to reorganize debts and repay them from future cash flows. The restructuring results in there being an approved Plan of Reorganization, voted and accepted by the creditors, that will outline how each creditor will be repaid. Chapter 11 petitions are generally utilized by business entities.


Chapter 12 Bankruptcy – A plan that is designated for family farmer debtors who have regular stable annual income tied to the farm operation. Its primary objective is to reorganize farm debt that aligns up with the value of the collateral, and there’s an expectation that the farmer debtor will be able to make regular payment under the repayment plan.


Chapter 13 Bankruptcy – A plan that is generally filed by individuals whose wages are used to satisfy unsecured and secured debts. The repayment plan is a new contract between debtors and creditors, where secured creditors are entitled to vote; a majority vote will bind the minority creditors to the plan. Repayment is expected to be at least three years, and possibly up to five years. In a Chapter 13 petition, creditors are expected to receive more than they would if the debtor’s assets were sold and the proceeds were paid to the creditors.  




Bankruptcy is an expensive, time consuming pain in the butt, for all stakeholders. It seems to be a last resort measure, or an emergency undertaking, where there are no better alternatives. NCARA believes a bankruptcy petition should be a rare occurrence, and only for clean-up purposes. Bankruptcy is the ultimate failure of the debtors and creditors to come to a suitable resolution in restructuring debt repayment. Hard heads may be prevailing in repayment negotiations where the creditor may be unwilling to work with the debtor because of bad feelings between the two parties. It’s like any situation between two people who can’t stand each other because of some offense given by one or the other, and then the other being able, but unwilling, to make any sort of concession to satisfy the other and come to an acceptable solution. It’s where creditors will gladly spend ‘good money, after bad’ and he doesn’t care otherwise. This is nonsense. 


It may very well be that a debtor has offended the creditor by being unwilling to provide certain financial reporting when it was due. Why, because the debtor is fearful and doesn’t know what he’s doing. To a creditor, this is terribly offensive, as it shouts out to the creditor that the debtor has no integrity, is dishonest and even worse. For why wouldn’t a debtor be honest and provide detailed financial reporting when it was due? Maybe the creditor is right. The debtor should have complied with his promised end of the agreement.


Well, for one thing, it may be that the debtor perceives the creditor as one who is a completely hard-headed, unreasonable, ugly jerk; you get the picture. Perhaps the creditor has been insensitive to the debtor’s financial circumstances, won’t listen, is offensive, demanding, and only wants his money back, like yesterday. The creditor’s demands may have been threatening to the debtor, so who in their right mind would want to even talk to that guy? Maybe the debtor is right. The creditor should have stopped treating the debtor as a ‘number’ and more like a human being.


By now, you should start to see and appreciate what can happen in a ‘work-out’ situation. If nothing is done, each stakeholder will be constantly fighting and becoming more frustrated with the other. And they’ll end up with an unwarranted expensive bankruptcy proceeding. 


Keep in mind that loan documentation will generally include that, upon default, the entire loan balance can be accelerated, where the full balance is due and payable. It would be like the loan maturity date was moved up to the present time. There is also usually a default interest rate, which can be as much as three percent higher than the normal interest rate, or much more. If you had intention of trying to cure the default, say, by making up the missed payments, it is possible that because the entire loan balance was accelerated, the full payoff would be due and payable to cure the default, not just the missed payments. Bankruptcy is pretty likely in that event.


NCARA is going to put the onus on debtor. Your name is on the Promissory Note, you are the one who promised to repay, not the creditor. The creditor was the one who took the chance and lent you the money; he just wants it back. So, you, the debtor will do something new and different, starting today. You will take a little time and pay close attention, in other words, take full responsibility for your debt repayments starting today. You will come up with debt repayment solutions that enable you to repay your debt ‘as best you can’. That means being completely honest and forthright in all your negotiations with the creditor. Not only will bankruptcy likely be avoided altogether, but the best repayment plan will likely be realized. We live in a period of time where that’s all anyone can ask, right?


Bankruptcy is very expensive and you will avoid an exorbitant ruinous experience; the creditor will likely recover most if not all of his money over still a reasonable time period, as your financial condition warrants. You have to fight for this. This is your moment, and you need to do your homework. You need to understand what the creditor understands about your financial condition and situation. You have to stop, take some time, and learn to appreciate, see, and speak the way creditors approach workout loans. You are in financial trouble, and the creditor likely has more to lose in your business than you do, depending on your debt to equity ratio – which you can calculate and appreciate for yourself. And, you have to ensure to cut out any fighting back and forth, if necessary. You have to go into this realizing that you are building a bridge across a ‘grand-canyon’ that may exist between you and your creditor. Unless you’re well-prepared to understand and use the right tools, you’re likely to stumble, or even fall off a cliff. So, what steps do you take?


Assuming you will take some time and understand the creditor’s perspectives and positions, the most effective tool you can use in crafting a repayment solution, besides all the required reporting, is the pro forma cash flow statement. Google up ‘pro forma cash flow statement’ for yourself; talk to your accountant and get to work on preparing your own. You, or your CPA, needs to prepare the next year’s cash flows, month by month, to show how you intend to stay in business, and what cash flows will be generated and used to repay your debts. Refresh the statement every quarter if necessary, or each month if warranted. 


All anyone wants, any creditor, any bankruptcy judge, any attorney, is for you to be honest and do the ‘best you can’ in repaying your debts as soon as is reasonably possible. What more can be done or asked of you? So, with overloaded bankruptcy courts, and asset quality in the tank for many creditors, you must step up; this is your time to step up big time. Avoid any contentious situation with your creditor(s), and use your pro forma cash flow statement to show the creditor exactly how and when you will repay your debts. If you find yourself getting heated or frustrated, step back and take a breath, and don’t go there again. Ask questions, listen carefully, and re-work your pro forma if possible. You will likely be very successful and will likely avoid having to go bankrupt.

CRM #5

CRM #6 – Borrowing Cause, Loan Purpose


Small businesses need to borrow money for a number of reasons. Primary reasons will be for either temporary or permanent needs, and corresponding loan terms will be applied. Borrowing causes or purposes may include asset inefficiencies, growth in sales, purchases of fixed assets or equipment, trade credit mix, and decreased retained earnings. The financing repayment term will be longer for fixed assets – set-up and installation of new equipment, moving to a new building, etc. Typical borrowing causes and purposes include:


Fund Increased Sales Growth (short or long term) – Working capital loan to fund an increase in accounts receivable (A/R) and inventory in the short term due to a seasonal spike. May finance the increase in trading assets not financed by accounts payable during high growth over a long period of time (permanent). There may be a term loan to amortized the permanent or core levels of working capital in a revolving line of credit. 


Fund Inventory Purchases – Fund a structural change in the business products, or simply taking more time to unload inventory. Possible changes in terms offered by trade creditors; take discounts from trade creditors.


Fund A/R – Fund accounts receivable during a period of slow collections from the normal time to collect on an account once invoiced. 


Fund Fixed Asset Purchases (new or replacements) – Longer term financing for new fixed assets to replace older assets, or to purchase new fixed assets. Long-term financing for purchasing a building, or a business acquisition. 


Refinance Existing Debt – Replacement financing with a different creditor to get better pricing and terms, etc.


Fund Poor Financial Performance – Renewal existing debt, or new debt, to provide liquidity for business operations under stress. 


Finance Disbursements to Owners – Used to fund payouts or owner draws. Replacing net worth with debt will increase leverage which will weaken the creditor’s overall protection for repayment (less retained earnings).


Pay Unexpected Expenses – Pay warranty expenses that were not expected. 




When you are experiencing a financial set-back, it’s likely that you and the creditor will not be worrying too much about identifying borrowing causes or purposes, for borrowing the money. When you can’t repay your debt as agreed, who cares about the original borrowing cause anymore? It’s likely that the existing terms and conditions will have to now change and will no longer reflect the true purpose of borrowing the money since the loan may be in default; fair enough.


But, it’s important to recognize that while you’re trying to get some sort of an extension or loan renewal, or even a workout or loan modification situation, you have to be reasonable in what you’re asking for. The creditor expects you to be reasonable. For example, you can’t expect a creditor to accept minimal payments (i.e., a 25-year amortization, 25-year maturity, and a low fixed rate) on a piece of financed equipment that should have been paid off in five years. So, if that’s what your pro form cash flow statement says you need, that you now need a 25-year clip, you’re going to have to get creative. Maybe a formal “A” and “B” note restructure, or getting some other creditor concession is more appropriate. 


Maybe your plan isn’t that serious, and you just need help for the next three to six months. Why? Because that is exactly the truth. You need a very small payment amount for the next three to six months – period. Roll up your sleeves then, and make your case, loud and clear. If that’s what it is now, and you expect that your repayment capacity will improve significantly after six months, couldn’t you promise the creditor that you will revisit your repayment plan before the six month period expires, and refresh your pro forma cash flow statement again for the next year or so. On your next go-around, you may be able to make a more normal payment amount; and then again, maybe you won’t. But whatever it is, you will be able to articulate your ability to repay, each time you revisit your plan. You and your creditor will begin to see eye-to-eye, and will come up with a strategy that makes sense to both of you.


So, when you think of realizing the original borrowing purpose or borrowing cause, be prepared to ‘stay in the correct lane’ as best you can. Be as prudent and reasonable as you can. Document your pro forma cash flow statement. Support it with written assumptions. Sign it. Stand up and defend it. That’s the bait creditors like to bite. Propose a repayment plan that makes sense for what you are financing. Again, creditors will work with you if your proposals are prudent, even if that means needing more time, maybe a lot more time. But to be unreasonable, to go ‘way outside your lane’, is not being, well, reasonable. Don’t hesitate to present ‘reality’ to your creditor, even if it first appears to be way ‘outside the lane’. If you need some real forbearance, then ask for it. 


If you can show you are in charge of your plan, that you know you can effectuate it, and stand behind it, the creditor will have increasing confidence in you. Refresh your pro forma cash flow statement as often as is needed, even if its mid-stream. Stay in business. Work it out. Repay your debts. As long as you’re willing to ‘get back up on horse’ each morning, any creditor worth his salt will work with you to help you stay in business. These times demand that. But you, the debtor, has to take the lead in order for this to work. You see that, don’t you?     

CRM #7 – Borrowing Entity, Ownership


Small business lending will include loans made to any number of legal entities. These entities have varying degrees of the following: ownership liability, continuity of business operations, management control or authority for decision making, the ability to raise capital, implications for being taxed, and the cost of establishing the business, etc. Common legal entity forms of business organization, and general characteristics, include the following:


Sole Proprietorship – One-person ownership of all assets and control of the business, unlimited personal liability, taxed at the individual rate on net income.


General Partnership – Two or more people ownership, with unlimited personal liability, shared control and authority, profits not taxed prior to distribution to the partners. 


Limited Partnership – One or more general partners and at least one limited partner who share ownership. The general partner has management authority and also unlimited liability. Limited partners only participate with their capital investment. 


Limited Liability Partnership – Functions like a general partnership in form, but provides each of its individual partners protection against personal liability for certain partnership liabilities. Management by the majority, with each partner paying taxes on his own share of the net income.


C-Corporation – Ownership is via purchased shares. C-Corporations legally separate shareholder assets from the corporation’s assets, with liability limited to the amount invested. Annual shareholder meetings to elect board of directors who hire senior management to manage the company under their direction. Taxes paid at the corporate rate.


S-Corporation – Ownership with 100 shareholders or less, with liability limited to the amount invested. Income is passed directly to the shareholders so as to avoid double taxation; the shareholders are then taxed on the income distributed to each.


Professional Corporation – Ownership by one or more licensed professionals (i.e., doctors, lawyers, accountants, dentists, consultants, real estate brokers, engineers, architects), unlimited personal liability for professional actions and limited liability for debts. Professional corporations pay taxes directly, but can deduct cost of salaries and benefits paid to the employee-owners; most professionals are paid out all their earnings in salaries, etc.  


Nonprofit Corporation – Formed by incorporators, has a board of directors and officers, but no shareholders, who receive no distributions from profits, but rather receive reasonable salaries. In order for contributions to the nonprofit corporation to be deductible as charitable gifts on federal income taxes, the corporation must apply to the IRS to show it was established for an IRS-approved nonprofit purpose.


Limited Liability Company – A business whose one or more member owners actively manage the business, and personal liability is limited. Income is passed directly to the members so as to avoid double taxation; the members are then taxed on the income distributed to each.




Keep in mind that while there are certain limitations of liability depending on the type of business you may have, you already appreciate the fact that if you own, say 20% of the business, you will likely have been required to sign a personal unconditional and unlimited guarantee to repay a given loan to the legal entity. In other words, just because you might have a 20% ownership interest in the company, you may be liable for 100% of the outstanding debt. Read your loan documentation to confirm your liability for repayment before you begin to negotiate a work-out or loan modification with your creditor.


CRM #14 – Credit Presentation


Developing a new credit relationship is a complex undertaking. Creditors will seek to understand a host of information from the potential borrower, once their general assessment of a potential loan makes sense and the creditor wants to do the deal. A credit presentation or credit memo will be developed and presented to the appropriate approval officers. 


The credit presentation will be a summary of the underwriting and may include: loan amount, borrowing cause, loan purpose, legal entity ownership, management, business operations (products, services, tenure, marketplace, competition), guarantors, interest rate and fees, primary and secondary repayment sources, maturity date, collateral, individual credit reports, financial statement and tax return analysis (balance sheet, income statement, cash flow, global and pro forma cash flows, trend and industry ratio comparisons), risk rating or loan grade, covenants, and environmental risk. These data will be gathered from business-pertinent financial statements and tax returns, generally, for the last three years, plus year-to-date interim financial statements, and personal financial statement(s) for individual guarantors. 


A credit analyst may be responsible for performing the detailed financial statement and tax return analysis using the three years of financial records. Understanding these reports will enable to the creditor to clearly see the financial condition and trends of the business, and the prospect for funding a loan request. Each component of underwriting is important, and the cash flow (and global cash flow) analysis will be used to confirm the ability to repay the loan. Additional detailed financial reports may be required, including accounts receivable (A/R), accounts payable (A/P) aging reports, inventory reports, etc. The analysts will recommend the loan structure, including any covenants to obtain future financial statement information and targeted financial performance covenants. The loan pricing and fees will also be determined. 


This information will be assessed and analyzed so those with delegated loan approval authority can make an informed decision to grant the loan. Most creditors are subject to certain regulatory and supervisory guidance to conduct safe and sound lending practices. Prudent underwriting is critical to the creditor’s long-term success. Creditors are also required to conform to applicable laws and regulations in the application or granting of credit processes, and there should be no discrimination of any applicant.


Lenders (i.e., financial institutions) routinely give specifically delegated loan approval authority to their officers. The larger and more complex the credit relationship, the higher authority levels are required. This may include a loan review committee comprised by members of the board of directors, who will also review certain loans made since their last meeting. Active oversight is a key function of the directors. The Chief Executive Officer (CEO) will have lending authority, as well as the Chief Credit Officer (CCO), Chief Lending Officer (CLO), relationship managers, and individual lending officers. The latter will have primarily responsibility for the preparation of the credit presentation, together with the assistance of a credit analyst. 


Should the underwriting include terms and conditions that don’t conform to the lending policy, those items will be listed as exceptions to policy, together with the reasons that mitigate the increased risk. The credit decision process will include enough time to allow the approval authorities to make an informed credit decision and close the deal before the loan commitment expires. Pending maturity dates for loans with balloon payments or lines of credit that will soon expire, but likely be renewed or extended, the underwriting for these deals will take place before those loans reach their maturity dates. Approvals may have at least a 30-day commitment period. Funds will not be disbursed until the creditor’s collateral liens have been properly recorded, or ‘perfected’. 



Your business is what it is, and you expect its performance to improve. Maybe it is less than what it was at the time of the original loan origination, but that’s okay. If you have a ‘history’ with the creditor, the creditor will know and understand, generally, why things are the way they are during a financial downturn. If you’ve been forthright and have a trusted relationship, you are likely to be inclined to continue to ‘tell it like it is’ and provide timely financial reporting that the creditor will use in addressing your workout loan or loan modification – through a credit presentation. By the time you provide any requested information, the creditor should clearly understand the root causes for your specific financial deterioration and be sympathetic to your plan to repay. 


It’s natural to avoid a creditor when there’s been a downturn. It may even feel like a ‘grand-canyon’ between the two of you. But, if you’ve taken ownership of your business, figured out how you intend to repay your loans, you should be eager to provide the creditor any requested information so he can complete his underwriting. The more communication, display of good faith and good will, the better. 

You can only do what you can do, and being completely forthright and honest about it, there’s a better chance than not, that the creditor will agree to your repayment proposal. Maybe he will or maybe he won’t. So, negotiate if you need to. That’s perfectly acceptable. In the end, you and the creditor should be on the same page, and an agreeable solution will be prepared on a credit presentation or credit memo. Once approved, you can put your focus and attention on making the plan a reality. 

NCARA believes in the debtor being empowered to repay its debts. An open communicative relationship with the creditor is essential. Let there be no ‘grand-canyon’ of misunderstanding between the debtor and creditor, and may the creditor clearly understand the debtor’s best efforts repayment solutions, and work with the debtor as much as possible. 


CRM #22 – Industry and Business Risk Analysis


Creditors generally are well aware of key industry and business risks as part of the underwriting process. Creditors also have ongoing credit risk management practices that include close monitoring, and will understand the risks facing their customers and most businesses in the industries they lend money in, and how well business owners can manage those risks. Creditors constantly seek to see how their clients distinguish themselves from ‘the competition’, after all, customers are limited and competition is keen – especially in an economic downturn. A close look at the products and services will be made to see whether there are any advantages a company has in the marketplace. 


Other business risks include a company’s suppliers, the production and distribution processes, as well as the sales process. How big is the company in terms of sales, assets, profits, and market share, and what stage of maturity is it at currently? Every business has a life to it, just like the natural person. Key risks include the maturity of the industry itself, technology advancements, where the industry sits in the current economic cycle, the cost of products, competition, operating conditions, regulatory oversight or burden, and how profitable companies have been in the past as well as projections for the future. 


One major business risk factor is the company’s management team/person, and whether there is a reputation of integrity in the marketplace. Does management have the experience, knowledge and back-ground to steer the company at the present time? Is there a strategic plan in place that is performing to plan? These are all questions that the creditor will seek to understand in order to determine the overall viability of a given company.




Whether you’re talking loan origination, or a loan modification of a seasoned lending relationship, you, the debtor, have an important responsibility in shaping the creditor’s understanding of the business and industry risks you are experiencing. This is part of you, the debtor, taking primary responsibility for creating your own debt repayment solutions, especially if you’re experiencing financial trouble. So, this is not a scenario where you assume the creditor truly understands your business risks or industry. The creditor is supposed to know your business and industry, but assumptions are not where you want to go with this, especially in an economic downturn with financial difficulties.


Creditors are represented by individual people, people who are learning themselves. There is turnover, training, lack of training, personnel shortages, and inexperienced workout officers. Of course, there are people who may have expertise in the industry but those people may be far removed from the actual front-line person responsible for working out a repayment plan for your business. So, what do you do?


First, you level-set the playing field. The creditor wants and needs to understand your points of view, the business risks you are experiencing or will soon experience. The same goes for the industry risks too. Do not assume the creditor even knows what you are talking about; it is possible they he may be less prepared than you think. Approach the creditor, probably a workout specialist, from the start, from the beginning, by supposing the individual assigned to your loan relationship is not all that familiar with the business or industry, again, like you might otherwise imagine. This new person may not be the loan officer you’re used to working with, so be patient, but consistent. 


Ask questions to make sure he knows what you’re trying to convey. Have a real two-way discussion. You need to give this creditor-individual the ‘why’ behind your repayment plan, and the understanding of what you’re actually experiencing that affects your operations and cash flow. You need to know that he ‘gets it’. Persist until he does.


Second, you should literally present, in writing, your ‘business risks’, and ‘industry risks’, so there can be no misunderstanding. Spell it all out and give plenty of context. This is your business you’re fighting for, so be clear. You will not regret it. Aside from making poor management decisions, if you can convey these risks, they will serve as the backdrop, the foundation, the ‘why’, to any proposed workout plan. You will recommend, as evidenced by your financial statements, and especially the pro form cash flow statement, a solution to your own debt repayment plan, and these risks are part of that plan. Focus will be on the statement of your future cash flows showing how you will repay debt over the next year or so. The written explanation of your current business and industry risks will support the forecasted repayment numbers.


Finally, the picture you paint of your business and industry risks will actually be used by the creditor as he writes up the credit presentation to get your workout plan approved. If your information is well-prepared and credible, you will make his job so much more the easier. If it makes sense to you, it will make sense to him. If you can stand behind the risks, if you understand them, put it all in writing and expect that your risk explanations will be acceptable. Creditors put a lot of weight on the information debtors present. If the creditor doesn’t ask for these risks, give them anyway so his understanding is genuine and up to date. If things change, let the creditor know those changes too.


CRM #28 – Management (Debtor)


From a business risk perspective, effective (debtor) management is key to a successful borrowing relationship. Essential elements of management include a reputation of unquestioned integrity in their business relations, tenure, experience, expertise, ability to execute the business plan and strategy, management information systems, controls, reliance on third parties, active board of directors, and personal decisions and consequences.


‘Tone at the top’ is an important symbolic representation of management’s integrity. Not only will it set an example (i.e., tone) to all other managers and employees, it will also be reflected in the company’s reputation in the marketplace. For example, how well can matters of confidentiality be kept, and certain private information be maintained? Management is expected to be honest and consistent in having moral and ethical principles. Resources need to be utilized appropriately, and employees need to have trust and respect for the management team. 


A seasoned management team, or manager who has sufficient experience working through multiple business cycles is important. Managers must have proven skills over an extended period of time to help ensure future performance. Creditors will take note of and seek to obtain confidence in management, and its ability to manage operations, financing, sales, and overall management. Is there reliance on one or more key people, and who makes the decisions? What if that person were no longer at the company, and is there a management succession plan in place? 


Other points for consideration are the information and control systems in the business, and how well they function. This may include how well the accounting function supports management and if outside third-party service providers are used. It’s entirely possible that ‘personal matters’ may arise and have a negative impact on management and its decision-making process.     




NCARA firmly believes that, come what may, management must maintain the utmost integrity and character in the repayment of debts even during times of poor financial performance. Maybe you feel justified in no longer cooperating with a creditor because he has made rash decisions, demanded too much too soon, won’t listen to you, or has treated you like a number or just another name listed on a report. You feel a certain sense of frustration like you’ve never felt toward a creditor before, right? After all, this is your business, and the creditor “doesn’t have a clue what’s going on”. 


So, how easy could it be for you, the business owner(s) or guarantor(s), to ‘turn’ on a creditor during difficult times. At the end of the day, the business is either going to ‘make it’ or it isn’t, and it will be what it will be, and hopefully it will be better. Think about this for a minute. Frankly, there’s no excuse or reason to ‘shaft’ a creditor because you think you can ‘get away with it’.  There is no moral or ethical way to justify you being anything less than totally honorable in dealing with all your creditors. You simply need to offer and do your very best, and let come, what may. 


For example, you ‘could’ discount and collect accounts receivable and build a secret war-chest to cover pending legal fees, pay certain other creditors who are not entitled to those funds, use business cash for a new gambling addiction, or squirrel away funds for your own well-being, etc. You ‘could’ liquidate inventory on the side after hours, and not account for it under the ordinary course; essentially you would be taking possession of funds that you control but really belong to trade suppliers, or first to a secured creditor. You ‘could’ sell an asset to a friend or associate that is subject to the lien interests of a creditor, and hope the creditor never finds it. There are a number of things you ‘could’ do to hurt a creditor, and you may even get away with it. And yes, it will cost the creditor additional monies to go after you for collection purposes and to liquidate collateral. But, is that what you really want on your conscience at the end of the day? Creditors have been known to spend ‘good money to go after bad’ because a debtor has clearly taken money belonging to the creditor through his shenanigans. 


NCARA recommends that you first empower yourself and take the position of understanding better how creditors think, and how and why he operates the way he does. Second, you will need to prepare financial reporting, especially your pro forma cash flow statement, and negotiate a repayment plan on a best-efforts basis. There is absolutely no need whatsoever to exhibit anything less than the utmost integrity in doing your best work, and negotiate in good-faith. This does not mean, specifically, that you offer a repayment plan that is too optimistic and something you think the creditor wants or must see. It doesn’t work that way.


As the owner of your business, as it’s manager, you know what it will take for your business to survive and eventually thrive, so that’s what you will present. – not what you think the creditor wants to see. If you don’t know your own numbers, then figure it out. And then present that. Effective management is everything when it comes to being empowered to get the creditor repaid as is appropriate. Creditors need to make prudent lending decisions. Show him why and how prudent your proposals are. As an effective manager/owner, do not forget that you are empowered to take the lead in your workout proposals. Document it well. Communicate, communicate, communicate. Make certain that you understand that the creditor understands what you understand. If you’re not certain, then start over until you are certain. That’s what effective management is – with integrity.

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