How To Get Out Of Debt When Your Business Owes A Lot Of Money (SBP 049)
There are now several different cases of people who take, who have taken, their lives because of the amount of money they owe because of bad debts, because they are in situations where they've taken out a loan they can't pay back. They cannot bear, the shame, the embarrassment, the personal disappointment. So they decide to take their own lives. And my contention with that is that maybe suicide solves your problem.
But the problem with suicide is it's a permanent solution to a temporary problem. And that's exactly what this episode is about. It's about showing you ways you can come out of that temporary problem. But when you take your life, you can't ever come out of the problem because, yes, you've created a solution, but it's a permanent solution to a temporary problem.
And in my opinion, that is too expensive. You've paid too much for that loan. You paid too much by paying with your life.
You paid too much. Every big thing starts small. It's a natural law. Every big multinational corporation was once a small business. Welcome to the Smallstarter Business Podcast, a unique podcast for practical tips and advice to help you start, grow or turn around your business.
Hello and welcome to another exciting episode of the Smallstarter Business Podcast. I am your host, John Paul Iwuoha. Today's topic is a topic that is very close to my heart because of how important it is to the survival of businesses and also the survival of entrepreneurs.
What am I talking about? I'm talking about how to get out of debt when your business owes a lot of money. We're coming out of a crisis, a global pandemic that has struck businesses in some very negative ways. There are businesses that have run into debt, serious debts, not by their own making, but because a pandemic came out of nowhere and then severely affected their businesses. So there are businesses that are going through a lot of tough times because they've defaulted on their loans, they took out loans, and right now they are either behind on their payments or they cannot even afford to pay back any portion of that loan. So if you have a business that is in that kind of situation, or you know somebody who has that kind of business that is in that kind of situation, this is really the episode you should listen to. And why is this very important? Like I said, it's a very touchy subject.
So people who have gone through these kinds of situations develop a paranoia for debt. I have met people who have said they will never touch a loan, even with a long spoon. They have a policy of: they don't ever take out loans. And if you listened to the last episode before this one, you would know what my position is on loans. And there is evidence for this. Most of the successful companies in the world use loans to their benefit. Many rich and wealthy people
across the world owe their success to loans. Because loans give you leverage. You are able to use other people's money to the benefit of your business. I can't think of anything that's better than that.
As long as you know how to use it well, it's a very sensible strategy. You use other people's money to benefit your business. You use other people's money to boost the capacity of your business to be able to do more and be more. It's a very sensible strategy, but then things go wrong if you're not able to manage that strategy well. So some people, when they've gone through trouble with paying back debts, they develop some paranoia, and then they just say: "Debt is bad. Loans are bad."
"Don't ever touch loans." "Loans are going to destroy your business." Like I said in the previous episode, loans are like fire. Yes, fire can be used to cook delicious food. Fire can be used to forge steel.
Those are good aspects of fire. But fire can also burn you. Fire can destroy.
So fire is neither good nor bad. It all depends on what you use it for. That's exactly what fire is. In the best classification, fire is neutral.
So this is why it's important because there are businesses that are living below their potential. Because they have this morbid fear of taking out a loan, because they've developed a paranoia for debt. Another reason why I decided to take on this episode is that a lot of people give up on their vision and dreams when they go into debt, and then they struggle, and then they don't ever want to go through that kind of experience again. So they shelve their dreams and their visions and their beautiful and brilliant ideas for life. They never go ahead to pursue their entrepreneurial ambitions. Why?
Because they had this terrible experience with a loan that went bad. And you can imagine what the world is losing because such people have made up their minds that they are never going to chase their dreams because of a bad experience they had with a loan. Imagine the kind of potential these people are losing on a personal level because they've given up on their visions and dreams because of a bad experience they had with a loan. I had a very terrible loan experience ten years ago, and I can only imagine if I allowed that experience to destroy me, I wouldn't be giving the kind of value I have now.
I wouldn't have the kind of business I have now. I wouldn't have the kind of life I have now. I wouldn't have the ability to pursue my visions and my dreams if I didn't recover from that.
So I know how psychologically damaging it can be when you go through hard times and you're unable to keep up with your obligations, you're unable to pay back a loan. There's a lot of shame and embarrassment that comes with it. There's a level of personal disappointment that comes with it. And then some people just say: never.
I'll never do this to myself anymore. So they just give up on their dreams and their visions. I don't want that to happen because like I said, loans are neither good nor bad. It all depends on what it's used for. And then the third reason why this is very important to me is there a lot of entrepreneurs who are going through very serious emotional distress and depression.
People are falling into depression because of the amount of money they owe to banks, to their creditors, and other kinds of people who they owe money to. So like I said, it comes with a heavy psychological burden. Apart from the financial burden you're facing, these kinds of people do not sleep at night. They slip into depression. And then that leads me to the final point, which is suicide.
There are now several different cases of people who have taken their lives because of the amount of money they owe, because of bad debts, because there are situations where they've taken out a loan they can't pay back. They cannot bear the shame, the embarrassment, the personal disappointment. So they decide to take their own lives. And my contention with that is that maybe suicide solves your problem.
But the problem with suicide is it's a permanent solution to a temporary problem. And that's exactly what this episode is about. It's about showing you ways you can come out of that temporary problem.
But when you take your life, you can't ever come out of the problem because, yes, you've created a solution, but it's a permanent solution to a temporary problem. And in my opinion, that is too expensive. You pay too much for that loan. You pay too much by paying with your life, you pay too much. It's a temporary problem.
So, sometimes, it's a lack of knowledge. And I'm hoping to plug that gap in this episode. There are things you don't know about bad loans that can actually take you out of it. And I'm going to give you some very sterling examples here.
In fact, let me just move right into it about important things to keep in mind. If you're in a bad loan situation, you've defaulted on your loan, you're owing people money, it could be your suppliers, could be your employees, it could be the bank; you're owing people money. You're in that kind of situation.
These are important things to keep in mind before I go into the specific strategies you can use to get yourself out of such situations. The first thing you need to realize is that the creditor, that person you owe money, that company you owe money, that bank you owe money, they don't want to lose their money. That's the truth.
They can threaten you. They can do all sorts. But the truth is all of those things they're doing is because they do not want to lose their money.
So, if you're willing to be reasonable with them, they will be reasonable with you. Why? Because they want their money back. They are human beings too.
They want their money back. So if you can reasonably show them a way through which you can help them get their money back, they are going to be reasonable with you. So that is one thing you need to keep in mind. The last thing your creditor wants is for you to die. The last thing your creditor wants is for that money to vaporize into thin air. Your creditor wants their money back.
So that's the reason behind all their anger, all the things that they've told you, all the terrible things they've told you. They want their money back. So if you really look at it that way, if they want their money back, they are willing to listen to any plans or offers you have that will help them get that thing that they want. So the essence of this episode is to show you a way you can achieve a win-win solution. You give your creditor what they want and then you get what you want. So that is one thing to keep in mind.
The creditor doesn't want to lose their money. The second thing you need to keep in mind is don't be in denial. Don't be in denial about the loan because the more you are in denial, the more the loan situation escalates. So it's a horrible situation. You don't want to deal with it.
It's embarrassing. It gives you sleepless nights, it worries you so you decide to just bury your head in the sand. No. With a loan, it won't work that way.
The best thing for you to do is to cooperate. Pick their calls. Don't avoid your creditors because that's going to make them angrier and more desperate because it will make them feel like you don't want them to get their money.
And don't forget the first tip I gave you. They don't want to lose their money. So when you're avoiding them, you're not cooperating, you're just making them angrier. The moment you cooperate and you're being reasonable, they're going to be reasonable with you.
So don't be in denial. The third important thing I want to share before I go into the strategies is: Be realistic. Don't promise what you can't deliver. Some people under that pressure start to make promises to their creditors that they cannot live up to. And guess what you're doing? It might give you some temporary relief, but you're just worsening the situation. Because what it means is that it will be difficult for your creditor to trust you anymore.
They will not be willing to listen to any other offers that you have. So you're making a bad situation worse. So don't make promises under pressure that you know you cannot keep. Promise what you can deliver. They may not like it.
The creditor may not like it. You may be offering something that is too long in terms of time. You may be offering a payback solution that is too slow.
They may not like it, but you need to promise what you can deliver. Because if you bow or cave into their pressure and tell them something they want to hear, you tell them what they want to hear. What you'll be doing is you'll be limiting your chances for getting their cooperation in the future. And that is something you don't want. The other tip you need to keep in mind is you should be willing to make sacrifices.
You're owing money. You have an outstanding loan. You have to tighten your belt. You have to make sacrifices.
It's just a phase. It doesn't mean you're slipping into poverty. Some people, because fear can be a very... fear is a bully. Fear starts to show you things that are unrealistic.
Like, this is the end of you. Your enemies are going to laugh at you. Your neighbors are going to laugh at you. All sorts of things. This is the end of you. You've crashed. And I'm going to give you some examples of some of the most successful people, iconic people that we look at today that went through the same kind of situation.
It's a phase. That's what I said. It's a temporary problem. And what you need is a solution to solve that problem. Rather than go thinking of a permanent solution to a temporary problem. It's only a phase.
You should be willing to make sacrifices. And then like I said before, don't kill yourself. It's only a phase. Don't kill yourself. Suicide is a permanent solution to a temporary problem.
And it is too high a price to pay. What you're owing is money. Why would you pay back the money with your life? It doesn't make any sense.
You're paying too much for that loan. You pay back money with money. You owe them money. And what I'm going to show you in this episode is ways you can find that money for them and more or less resolve the situation. Simple. You don't pay back money with your life. There is no price on life.
You're paying the ultimate price for what? For a loan, for a temporary problem. It doesn't make any sense. And then the other thing you need to understand is that several successful people and wealthy people have gone bankrupt and bounced back. Many of them have almost gone bankrupt and bounced back. And many of them are iconic names, big brands.
They are the entrepreneurs behind the most successful businesses today. And beyond entrepreneurs, There are successful athletes in their own right. So Henry Ford, the Ford Motor Company, the founder of the Ford Motor Company, he got bankrupt. But today, where's the Ford Motor Company? It is one of the most successful car companies in the world.
PT Barnum the Entertainer. Larry King. Larry King just died recently, but he was a journalist, very successful and very wealthy man. He also filed for bankruptcy. George Foreman, the iconic boxer, slipped into bankruptcy and then recovered and then established a very positive net worth. Milton Hershey, behind the Hershey's brand, one of the biggest chocolate brands in the world, also filed for bankruptcy at a time.
And one of the most famous ones is Walt Disney. Walt Disney had mental breakdowns. He went through a difficult bankruptcy. But today, where's the Disney Company? The Disney Company is arguably the world's biggest entertainment company. It's one of the most iconic brands in the world.
But the founder went through the same trouble. He had to file for bankruptcy. He had mental breakdowns.
He had psychological trouble. So these are things you need to understand. It's only a phase. It's only a valley. And if you keep yourself focused on the solution, you are going to get through that phase. So now that I've talked to you about these important tips, because it's important to get all these things out of the way. Let me now talk about some specific
strategies you can use to manage a loan crisis. You're owing money to your suppliers, even your customers, your employees, your investors, your bank. These are options.
Like I said, they are offers. They are not magic solutions, but they show a way out of the problem. And like I told you, your creditors want their money back. They don't want you to die.
They want a reasonable solution. They want a reasonable offer as to how they can get back their money. So very important. So when it comes to these offers, I have four main categories, and I'm going to start with the first one.
The first option is to restructure the loan. When we talk about loan restructuring, there are different ways you can do it. And I'm going to give you about five or six examples right now. So one option.
This is usually very common for early-stage businesses, people who took out a loan to start a business. And the business is going through hard times. Maybe you're still struggling to make sales, get customers, build out your products, and things like that. Then you're getting pressure from an early investor or creditor or somebody who gave you a loan to start that business. One option is convertible debt.
They are called convertible notes. Now just listen to this. The way a convertible note works is convertible notes are usually given to early-stage businesses. And early stage businesses are risky businesses. So when an investor wants to invest in your business at that stage, they give you a loan.
And the reason they are giving you a loan is that because your business is still in the idea stage, your business has not been validated. Nobody's really sure if the business is going to work. So if a person gives you a loan, what that means is that you must pay the money back if the business doesn't work. But if your business works, that loan can be converted into equity in your business. Usually it's based on a trigger event. One of the most common trigger events is if you raise money from investors.
If you raise equity from investors, anybody who has given you a convertible debt, a convertible note, has the right to convert that loan into equity so that they now become an investor, an equity investor, in your business. So I can fathom a situation where somebody has given you a loan and then they're putting you under pressure and the business needs time. You can see the potential of the business, but it needs time to sell the product, get customers, make sales, and stand on its own. One way you can buy time is to make the offer of making that loan a convertible note.
And this all depends on your confidence and your ability to sell. You tell the person that this business has potential. "Just look at the kind of milestones we're hitting." "And we don't want to miss out on this opportunity because of the pressure you're giving us." But guess what? You have an opportunity to convert your loan into equity in our company. So rather than that loan, we can give you a stake in our company as equity.
And you know what equity is? Equity is patient capital. When somebody gives you equity, they do not have a right to more or less get something in return on that money unless the business makes money. So if the business makes money, the equity holder makes money.
If the business doesn't make money, the equity holder doesn't make any money. So it is an offer you can make. Let's convert your loan into equity in the company, and then equity buys you time.
Equity is patient. Equity shares risk with the person who has given you the loan. So I'm not saying they are going to say yes to your offer, but this is an offer you have to put on the table because your creditor is looking for a way to get their money back. And with a convertible debt offer, what you're doing is you're giving them an option to make much more money on top of the money that you are currently owing them, which makes a lot of sense. You're offering to pay them more than you already owe them if they are willing to share the risk with you, if they are willing to wait a little longer and give your business time to realize its potential.
The second way you can restructure a loan is to put a moratorium in place. A moratorium. So what a moratorium means is a pause on any loan repayments. So if you're supposed to be paying back $1,000 every month or $10,000 every year, what a moratorium means is that for the next three months, what you're saying is, please give me the next three months. Or the next six months. A moratorium for the next six months means I don't pay anything for the next six months so I can have time for my business to recover and then I can resume the loan repayments.
This is an offer you're putting on the table right now among the law of pressure. This business needs time to recover. We've gone through a COVID-19 crisis. We've gone through a terrible time. We've gone through an unfortunate incident. One of our locations caught fire, our warehouse got burnt.
I'm not saying I'm not going to pay back your money, but I need a moratorium. Can I get a moratorium for three months or six months? A moratorium means I'm not paying back anything for six months. And then after that time, I resume the payments. Can we do that? So it's not as if the creditor is losing the money for six months, all you've just done is you've just bought yourself time. You've just pushed the loan repayment forward. So if the loan repayment was supposed to stop at the end of the year, it would then stop at the middle of next year because you've asked for a six-month moratorium.
Like I said, your creditor is willing to be reasonable. If you can be reasonable with them and tell them if you give me six months, I can get this business back on its feet. This is my business plan. This is our plan to recover.
This is our recovery plan. These are the things I'm putting in place. And within six months we can resume loan repayments. So all I need is a moratorium to buy me time.
It's an offer you can put on the table. I'm not saying the creditor will say yes, but it's an offer. The third option for restructuring the loan is to reduce or waive all or part of the interest. So, for example, I can come and say last year we had a COVID-19 crisis. Our business was not open for seven months.
For seven months, we didn't make any sales. But I had to keep paying my employees. I had to keep paying my rent and all of that. But I didn't make any sales. So can you be reasonable enough to waive the interest part of those six months for me or those seven months? So you're not saying you're not going to pay back all you're saying is that the business did not make any money. In essence, the loan did not yield any income for the business.
It's not like I'm cheating you. I didn't make any money. So all I'm saying is why don't you meet me halfway, right? So I'm going to pay back the money, but can we waive the interest for those six months that the business didn't do anything? I'm not saying the creditor will say yes, but it's an offer and it's a reasonable offer because COVID-19 happened to everybody. Or maybe if your business went through an unfortunate situation. It didn't happen in the dark.
Maybe the investor or the creditor knows about it. So it's an offer you can put on the table. I'm going to pay back the rest of the loan, but can you please waive interest for that period? That's another way to restructure the loan. Another way to restructure the loan is to space out the installment payments. You can come up with an offer and say, the way business is right now, I cannot meet up with monthly installmental payments.
Paying back at the end of the month is too aggressive for where the business is right now. Can we switch to quarterly repayments? So I pay you at the end of the quarter. You're still getting your money for three months. It's just I'm not paying you at the end of every month. I'm buying time by paying you a lump sum at the end of the quarter.
Or can I pay you twice a year: in the middle of the year and the end of the year? So you space out the payments just to buy your business time. Sometimes all the business needs is space to breathe, just breathing space. And if you can ask for that, the business can recover. That's all you need. You're just buying time. And then when that burden is lifted up off of you, you can function.
You can think about your business. You can start getting inventive and creative again and start looking for ways to make money in the business. So you can push forward the payments and say rather than monthly installments or rather than weekly installments, can we do it this other way? Can it be quarterly? Can it be bi-monthly? Can it be bi-annual? You can space it out. I'm not saying the creditor will say yes, but it's an offer and it's a reasonable offer.
You're not saying you will not pay back. All you're doing is you're buying yourself time. Another option for restructuring the loan is to more or less change the way you're paying back that loan. Remember, every loan has two components.
The first component is the principal. The principal is the amount of money the bank gave you, for example, $10,000. If the bank gives you $10,000 at 5% interest rate, what it means is that the principal is $10,000, and then the second component of the loan is the interest component.
The bank gives you a $10,000 loan at 5% interest. The principal is $10,000. The interest is 5%, which is $500.
That's the interest on that loan. I'm assuming the 5% is per annum. Per annum is every year. So every year the bank charges you $500 for using that loan. So the bank gives you $10,000.
What you pay back to the bank is $10,500. That's exactly what it is. So there are two components. The principal is the money the bank gives you. The interest is what you pay for using the loan.
So another way you can restructure the loan is to say, let me pay you the interest now and then I pay you the principal later. So as you can already imagine, the interest is usually lower than the principal. So you can say, you know, rather than just leave you empty handed, why don't I pay you the interest, let me pay you the interest, and then we can defer the principal. Maybe I can pay you the interest every month, but then I pay you back the principal at the end of the year in lump sum rather than paying you bits of it at the end of every month, which might be heavy for my business. So I just pay you just the interest components, maybe at the end of every month, at the end of the quarter or whatever arrangement you come to. But the principal sum will be paid later.
That is an option for restructuring the loan. And then another option is that you pay both the interest and the principal later. So I've seen situations where one of my clients actually took out a loan, and the loan is for two years. It's a two year loan, but both the interest and the principal of that loan will be paid at the end of the two years. So, you see, that is a very interesting way, because what it does is that your business has two years to breathe. You bought yourself time.
You are not under any cash flow burdens. Your business has time; has two full years to do the best that they can. Then at the end of the two years, you pay the full principal and the full interest. So depending on the kind of business you're running, I can see where that makes sense. So if you're running a business that requires time to invest the loan in the business and it requires time to reap the benefits of that loan, getting two years or one year where you pay the full interest and the full principal at the end of that period is something that makes sense.
So rather than charging you, rather than asking you to pay installments at the end of every month, at the end of every quarter, which will be putting financial strain on your business, you can say, you know what? This is the offer I have, this is the plan I have to expand this business, but I need time. So what I'm offering you is I'm going to pay you the interest and the principal at a certain time in the future. It can be six months, it can be one year, it can be two years, just like my client did. So these are options you have for restructuring the loan. Don't forget, your creditor is willing to be reasonable because they want their money back.
Some people might say, if you continue going by way of threats, you can threaten me and we end up in the courts. And all we're going to do in court is we're going to spend more money. We're going to spend more money on our lawyers, our attorneys and all of that.
And at the end of the day, we're just going to be wasting time. So rather than going by way of threats or taking me to court, this is an offer I have. This is the business plan. This is what I plan to do.
I'll pay you this money at the end of one year, the full money, the interest and the principal. There are ways if you're confident enough and you're able to sell your offer and that person believes you, you sound credible. Remember, your creditors are willing to be reasonable.
So that's the first option to restructure the loan. And just to run through, under restructuring the loan there's an option for convertible debt or notes, where you ask the person, you make the offer to convert the person's loan into equity in your business. There is the option for moratorium on payments where just asking for some time to breathe, where you don't pay back anything.
It could be three months, six months, a month, whatever that period is. You're asking for time, more or less, for your business to recover, and then you resume the payments. The person is not waiving the loan repayments. The person is just giving you time to breathe. That's why it's called a moratorium. The third option is to reduce all or part of the loan interest so the person can waive or reduce some of the interest or all of the interest, depends on what you're asking for.
Another option is to space out the installment payments. Maybe your current payback timeline is too aggressive. You can ask for something that is much more spaced out.
If you're currently paying at the end of the month, you can ask to pay at the end of the quarter or the middle of the year. Another option is to pay the interest now, but the principal later. And then another option is to pay both the interest and the principal at a time in the future so that you have time to breathe. So that's it for restructuring the loan. The second option, the second strategy you can use if your business is in trouble and you're coming under pressure from your creditors is to refinance the loan now. Yeah, refinancing is what financial professionals will use.
But let me break it down. Essentially, what refinancing the loan means is that you're going to "borrow from Peter to pay Paul." I know you've heard that axiom before, that idiom, you "borrow from Peter to pay Paul." So let's imagine you're owing the bank $10,000 and the bank is coming on you, right. You can get another option to borrow money. You borrow $10,000 or even $15,000, depending on what you want.
You take that $15,000, take out $10,000 plus a little more, and pay back the bank and then maybe use the remaining money for what you want to use. You're going to be surprised how often big companies do this, but the little guys don't hear about it. It's just happening up there. Many big multinational companies refinance their loans all the time.
So they "borrow from Peter to pay Paul." Now, why would you borrow from Peter to pay Paul? Sometimes this idiom is used in a negative way. Like it's not a smart thing to do. Why would you borrow from somebody to pay back another person? But it makes sense to borrow from Peter to pay Paul if Peter can give you better terms. So if the loan I'm paying back is at 10%, the person is charging me 10% per annum on their loan.
If I see an option that's willing to give me the same amount of money but at a cheaper interest rate, why wouldn't I borrow from Peter? Peter is giving me better terms. So what I do is I take that new loan from Peter. Peter is offering me the loan at 8%. I borrow the loan, I take the loan from Peter at 8% and then I pay back this other loan I'm owing at 10%. So all I'm doing is I'm taking a cheaper loan to pay off a more expensive loan. Makes sense. Makes a lot of sense.
But the goal now is to convince Peter to give me that money. And of course, Peter represents any other source of money, any other source of funding that can give you better terms or even equal terms. So for example, it might not be the interest rate. It might just be that the bank you're owing has a much more aggressive, has much more aggressive terms. They are asking you to pay back the loan installments at the end of the month and it's very aggressive to your business. They're charging you 10% interest and they're asking for monthly repayments.
If I see another option that is willing, another source of capital that is willing to lend me the same amount of money, but here's what they are saying: You know what, you don't need to pay at the end of the month, pay us everything at the end of the year, the interest and the principal at the end of the year. It's still the same interest rate. They're charging me the same interest rate. But their terms are better because in terms of cash flows and payback, I can breathe more with this new option. I don't need to struggle at the end of the month to go find money to pay back until the end of the year. I have until the end of the year to pay back the interest and the principal on the money.
So what I do is I take the money from this new source because the terms are much more agreeable to my business and then I pay off the other lender whose terms are too aggressive. So that is a point where it becomes a very valuable strategy when you're owing somebody but then the terms are putting you in trouble. You can find another source that's giving you better terms and then pay off the other person. So it makes a lot of sense.
That's what refinancing is all about. It's about borrowing from Peter at the better interest rates or better terms to pay off Paul, whose terms are not agreeable to your business. And like I said, big companies do this all the time. If it's very it's quite common. You can even fathom situations where... you know banking is a business, right?
So a bank is trying to get this big company as their customer. And then they come and they say, we've been trying to do business with you guys for quite some time, but then we haven't seen the opportunity. But right now we noticed that you have a loan from Bank B, right? And Bank B is giving you this loan at 10% with all these terms. We can do better. We can give you that same loan at 7%. Better,
much more agreeable terms, in terms of when you pay back the money and all of all these other things. If I'm that sort of company, that's a very solid sales pitch. I would go with the other bank.
Why would I keep taking out an expensive loan when I can get a cheaper one with better terms? So that's how banks compete with themselves. They go to each other's customers and try to give them better deals so that the customer can move from one bank to their own bank. So it's one way. And refinancing is one other way. They can say, the customer can say, "I'd like to do business with your bank, but the problem is we already have a loan with this other bank." And then the new bank would say, "So how much are they giving you the money, at what interest rate?" "What are the terms?" And they're like, "Oh, don't worry about it."
"We're going to refinance that loan for you." "We're going to give you the same amount of money they're giving you at a lower interest rate, better terms, so you can pay them off and come become our customer." It happens all the time. So refinancing your loan is an option that is on the table. Now, the third strategy to get out of a terrible loan situation is if you find that you cannot restructure the loan and you cannot refinance the loan, the other option you have is to sell assets or give up collateral. This is a distasteful option for some people.
It might not be an option that people would like, but it's a practical option. You're owing somebody money. You've tried to restructure the loan. They are not budging. They are not accepting your offer to restructure the loan.
You've tried to refinance the loan, but you can't find any other source of capital that will be willing to give you money so you can pay off the other person. You then have limited options. The next option is what assets do I have that I can sell? It's happened to people, people who are in tough situations and they are coming under serious financial pressure. They look for an asset they have.
Most times it's real estate. It can be land, buildings, equipment, vehicles. They sell it, and then they use the proceeds to pay off their loan. It requires sacrifice.
It's not a very pleasurable situation, but you have to do what you have to do. That's what entrepreneurship is all about. You have to be practical.
You can't just bury your head in the sand and pretend like it doesn't exist. The longer you wait, the bigger the loan gets. So right now, it may not be comfortable to say you want to sell your car, you want to sell a building, or you want to sell your stocks.
The stocks you have that you've been accumulating for the last decade. It may not be things you want to do, but if you have something around your neck, you have to get rid of it. If not, it's going to strangle you. So sometimes people find themselves in those kinds of situations where they have to give up their assets to settle outstanding loan obligations that they have. And this is the reason why banks ask for collateral. So you walk into a bank, they tell you, okay, we're going to give you the loan, but we want collateral.
Do you have any valuable property that you can use as security for this loan so that in the event you cannot pay back this loan, we can take over that property, sell it and realize the loan you're owing us? Now, for those who don't know, this is how collateral works, right. You use your house as collateral for a loan and your house is worth, let's say $100,000. What you owe in the bank is $40,000. You cannot pay back your loan, and then you've already used your house as collateral.
What it means is that the bank is going to sell your house, and under forced sale if they are able to make up to $100,000, no problem, or whatever amount they're able to make. If they sell the house, for example, for $100,000, they will take their $40,000 and give you your $60,000. It doesn't mean that they are going to sell the property and take all of the money. No.
All they are doing is that they are getting back to the money that you owe them. They sell the house, they take their own share, they give you your own share. So now that I've explained this, have you seen some interesting options? Does that put an idea in your head for refinancing your loan? For example, I approach somebody who is a wealthy person, and then I say, "I'm owing the bank money and then I've used my property, my house, my building, as security for that loan.
But I don't want the bank to sell that house. I want you, I want you to refinance that loan and then I'm going to use my house as collateral. So what it means is that rather than the bank foreclosing on the property, you can borrow money from this new person, pay off the bank, maintain your property, and then now you have to focus on how to pay back that person. So it's just that you are controlling the situation. If the bank sells the property, you think they might sell it at a price that is a giveaway price. So to try to avoid that situation, you get somebody else involved and take the bank out of the picture, pay off the bank, and then you have a new loan provider, a new creditor, who likely or hopefully has given you better terms than the bank was giving you.
So selling your assets or giving up collateral, you might not like it. It's not a comfortable option, but it's a practical option, especially when you have a loan obligation or burden that is coming around your neck and trying to snuff the life out of you. The fourth strategy, which is the last resort, you've tried restructuring, it's not working.
You've tried to refinance the loan. It's not working. You've tried to sell your property, or maybe you don't have any property to sell to pay back that loan. The last option you have is not to kill yourself.
The last option you have is to run to the state. And when I mean running to the state, you file for bankruptcy. It's not something you want to hear. But like I told you in the beginning, Walt Disney did it. Larry King did it.
Henry Ford did it. George Foreman did it. Hershey's did it. Many of these big names you've heard that have successful companies, they went through this. They had to go through the indignation, the shame, and the embarrassment of filing for bankruptcy.
But guess what? Shame cannot kill you. People will only talk. Embarrassment cannot kill you. People will only talk. What kills you is what you do with what people are saying about you. Because guess what? These are the same people who are going to praise you when you're doing well. So now that you're not doing well, what do you expect -- that they are going to keep quiet? No, people will always talk.
Mouths are always there to talk, whether the news is good or it's bad. So if you expect them to sing your praises, they're also going to gossip about you and say all kinds of terrible things about you when you're not doing well. So you cannot take your own life or do something crazy or seek a permanent solution to a temporary problem because of what people are saying about you. These are the same people who are going to sing your praises when you bounce back. So you can't control what people say and you can't take actions based on what people are saying.
You have to do what is right for you. You have to do what you have to do. So if you've come to that point where you cannot restructure the loan, you cannot refinance the loan, you cannot sell your assets or liquidate any assets you have, or give up the collateral you've pledged, you file for bankruptcy.
And what bankruptcy does is you are running to the government. You're running to the state to say, "my creditors are after me and I cannot pay back." So what the state will do is the state can give you certain protections from your creditors. For example, your creditors will not be able to touch your house. That's where you live. So the state is going to say, there's no point making this guy homeless.
Leave his house, leave his car. If your car is at least something reasonable, it's not as if you're driving a Rolls Royce or a Mercedes AMG, or one of those top performance cars, or you're driving a Ferrari. If it's a reasonable car, leave the car for the guy so that, more or less, he can come back to himself. He can bounce back. So those are some of the protections that the state can give you when you file for bankruptcy. In the US, it can be chapter seven or chapter 13 bankruptcy.
Every country has different laws around bankruptcy. When you can file for bankruptcy, what you can get from filing for bankruptcy, what your creditors can do or cannot do, and all of all those things. So you need to look at that. It's an option on the table that people don't take now.
But the thing is filing for bankruptcy and killing yourself, which option would you rather choose? But the thing is, like I said, some people are not aware of the options that are available to them. So in that ignorance, they think that killing themselves is a solution to the problem. Like I said, yes, it's a solution, but it's a permanent solution to a temporary problem. Paying for money you owe with your life is an expensive payment.
You pay back money with money. You don't pay back money with life. There is no price on life. And of course, once you kill yourself, you're out of the game. You can't bounce back, you can't recover.
You can't be the comeback story. You can't be the underdog. You can't tell the story of how you hit the bottom and you rose back up. Once you take yourself out of the game, the story will be: here was a man who was taken to the ground or dragged to the ground by his problems and he stayed on the ground and actually went under the ground. That's what it means when you take yourself out of the game, you take yourself under the ground. What you should do is to look for a way to bounce back from the ground.
And these are options that I'm trying to help you think in ways that are... depression will not help you. Emotional anxiety will not help you. What will really help you is thinking of reasonable ways. Ways you can be reasonable with your creditor so that they can meet you halfway and then you can find your way out of this problem.
Like I said, bankruptcy laws are different across the world. If you can ring up your lawyer or your attorney and ask them, I'm at this point right now, the business cannot pay back. Can I file for bankruptcy? What are the options that are available? I also need to mention here, I'm not a lawyer, but this is my own understanding because even as an accountant, we have to look at some of these aspects that are close to more or less how loans can affect a business. Now there is this thing called "limited liability." When you register a company as a limited liability company, what it means is that your business is separate from you as an individual.
Now here comes the important question. Did you take that loan as you as a person or did your business take that loan? If the loan is in the name of your business, then it has nothing to do with you because that corporate veil, there's a corporate veil that separates your business from you. Your business is a legal entity that can have assets and have liabilities, that can borrow money, owe money, and all of that. It's separate from you. So if your business is in debt, it doesn't necessarily mean that you personally are in debt.
So these are some of the simple ways you can protect yourself early on. You're taking out a loan, it should be in the name of your business, not you, because if the business owes money, the bank can come after the business, but they can't come after you because the loan is not in your name. But if the loan is in your name, they come after you directly. That's an important area you need to look at because this is the way wealthy people and smart people do it. They set up a business, that business files for bankruptcy, the business is shut down. They go and start another business.
I'm not encouraging you to do that, especially if you're doing it out of mischievous intent, if you're willfully taking loans from people, intentionally not paying back just because you want to bankrupt that company and go start another one. That's what I'm asking you to do. But it's an option that is available to you. If genuinely you've taken a loan... No, not you,
your business. If your business has taken a loan and your business cannot pay back that loan, just know that it doesn't concern you as a person. There's no point killing yourself for that loan. Your business is a separate entity under law and then if you're going to file for bankruptcy, it's a business that files for bankruptcy, not you.
But then you have to make sure that in the early days of the business, you've taken all these precautions. You make sure you are running your business as a separate entity from yourself. When you're taking the loan you take the loan in the name of your business, not in your own name. So if anything happens, your business is liable, not you. So at this point, let's recap.
I started this episode by talking about the trouble that people go through when they are owing money, when they have outstanding debts that they are struggling to pay. I told you how it's led a lot of people to have paranoia for debts. Some people will never take loans anymore because of the bad experience they had. As far as I'm concerned, they are missing out on the potential, on the value of loans, because loans give you leverage. They give you the ability to use other people's money.
I talked about the emotional distress and depression people go through because they are owing money. I also talked about people paying the ultimate price, paying the price of a loan that they owe to other people with their life, which I think is too high a price to pay. You can't pay back a loan with human life. There is no price on human life. And the second thing is that you cannot use a permanent solution like suicide to solve a temporary problem, like difficulty with paying back your debts.
They are mismatched. And then I also gave a couple of important tips to keep in mind. The creditor doesn't want to lose their money. They don't want you to die. They want you to be alive so you can pay them back. So once you have this in your mind, you should realize that your creditors are willing to be reasonable if you're going to make them reasonable offers.
The second point is don't be in denial. Cooperate. Don't try to avoid your creditors. That will only make them crazier and they will become more desperate, more or less.
It will be difficult to believe anything you say. You have to be realistic. You're coming under a lot of pressure. Yes. You're under a lot of psychological distress because of the money you owe. Yes. But do not make promises you can't deliver.
Because if you make promises and you don't keep those promises, you make it difficult for your creditors to believe you the next time you make them an offer. The next thing I said was you have to be willing to make sacrifices. It's only a phase. You might lose some things. It might cost you some personal disappointments.
You might feel shame, embarrassment, what people are going to say and all of all those things. But don't forget, it's a temporary phase. It's a phase that's going to pass. Like I also said again, don't kill yourself. Suicide is a permanent solution to a temporary problem. It's also a price that is too high to pay for money that you owe.
There is no price on your life. As long as you're alive, you're still in the game. As long as you're in the game, you can bounce back. The worst thing you can do is to hit the ground and go under the ground because that's what suicide does to you.
You go under the ground. That's not a great story. A great story is that you hit the ground and then you bounced back. That's why we celebrate all these people.
And I told you about all the successful and wealthy people, some examples of people who have gone bankrupt and almost gone bankrupt. Talked about Henry Ford, PT Barnum, Larry King, George Foreman, Milton Hershey, behind the Hershey's chocolate brands, the global brand, Walt Disney, the entrepreneur behind the biggest and most successful entertainment company in the world had mental breakdowns, went through bankruptcy more than once. So it's important to keep these things in mind. And I talked about specific strategies. The first strategy is to try to restructure the debt, and I give you specific options. You could make an offer to convert the loan into equity.
You could shift the payment timelines. You could ask to waive interest payments. You could ask for a moratorium. And a couple of examples I gave you. The second strategy I shared is to refinance the debt. Many big companies, multinationals do this all the time.
They borrow from Peter to pay Paul. You borrow from Peter. If Peter is giving you a loan at better terms, it could be a lower interest rate and much more agreeable payback timelines.
You take that loan and you go pay off the loan you owe right now where the interest is higher and things like that. So companies do this all the time. You refinance your debt, you borrow from Peter to pay Paul if Peter is going to give you better terms.
The third strategy I shared with you is to sell assets or give up collateral. It's not an option that may be comfortable. It might not be an option that you like, but it's a practical option. If you're owing money and that money is increasing in size every day, you can go take out an asset that you have, something valuable, sell it, so you can get back your peace. And then the fourth and final strategy, the option of... your last resort. It is not suicide.
Your last resort is to file for bankruptcy. So if it's a personal loan, it's likely you're going to be filing for personal bankruptcy. If it's a business loan, it's likely you're going to file for bankruptcy for that business. I gave you examples of many of the successful people we know today who filed for bankruptcy and made it back.
It's not something anybody prays for. I don't pray for it on myself. But I hope I have the guts to be able to... And the reason why these things happen is that we're thinking about what people say. And like I said before, people will always talk.
If you succeed, they're going to talk. They will sing your praises. They're going to give you titles, call you names, extol you, call you the role model. They're going to celebrate you. They will talk.
Don't expect that those same people will not talk when you go down. They're also going to talk. They're going to gossip about you. They're going to laugh at you, laugh about you, talk behind your back.
That's what humans do. So you cannot be making decisions on the basis of what those people are going to do. You need to think of what is best for yourself and how you are going to bounce back from this low point.
So at this point in the episode, there are four things I want you to consider. The first is to join the Insiders program. I can't tell you how important it is to get high-quality counsel. You're at that point where your business is going through serious trouble, and then you are weighing your options.
Sometimes what you don't know can kill you. Some people kill themselves out of ignorance because they feel they don't have any options. But there are several options. It's just that they don't know about it. So what you don't know can kill you. Who you don't know can mean that you have limited access to the information that you require to make the right decision that is best for you.
That's why I created the Insiders Community. It's a community of entrepreneurs who are building businesses in different countries, in different industries across the world. We are there to share ideas. We collaborate.
We share experiences. We knock ideas off each other. We're networking. We're collaborating. You're learning from people who are several steps ahead of you, who have made some of the mistakes you're about to make, who have recovered from some of the troubles you're going through right now. There's a lot you can learn from that rather than learning from your own mistakes or learning from trial and error.
So to learn more about The Insiders program, check us out at: smallstarter.com/insiders smallstarter.com/insiders Again, it is: smallstarter.com/insiders
smallstarter.com/insiders The second thing I need to ask you to tell your friends about this podcast. Information is power, and information can save your life.
So this information you are getting is free. This information, because it's on the Internet, I don't know how far it's going to reach and who is going to help, or how many lives it's going to save. As long as I've released this episode, this is going to exist for hundreds of years, as long as the Internet is available. So I'm hoping that for everybody who has the benefit to listen to this, when you're in trouble, you can come back to this episode and listen to this episode and see more or less the kind of options you have. Make the offer to your creditors, they are going to be sensible. So that's why I want you to share this with your smart friends.
Let them know about the Smallstarter Business Podcast. Recommend this episode to them so that they too can learn and gain the liberation that information and insight can give you. And if you want to give us a pat on the back, you've been listening to the Smallstarter Business Podcast for quite some time, you want to say thank you, One way you can do that is to give us a 5-star review.
If you love what you've been hearing. And you can do that at smallstarter.com/review smallstarter.com/review
smallstarter.com/review, and then you get the options for where you can leave us a review. So again I have to come back to the insiders program. You're running a business. You're trying to start a business.
You're trying to grow a business. You're going through business trouble. It could be with raising capital. It could be with sales, it could be with hiring and keeping loyal people. It could be restructuring your business and systematizing your business. Join the insiders program.
Save yourself the discomfort, distress and the waste of trial and error. Come and belong to a community of people who have done what you're trying to do, who have seen what you're going through right now, who have recovered, who have much more experience, who have learned something in another industry that could benefit you in your own industry. It's very important; what you don't know can kill you.
Who you don't know can actually harm you. So I look forward to the very next episode. Until then, stay safe, enjoy yourself. Don't look for a permanent solution to a temporary problem. As long as you're in the game there is still an opportunity for you to bounce back. Cheers. Bye bye.
I hope you enjoyed this episode of the Smallstarter Business podcast. To take our free business courses or join one of our signature programs for special entrepreneurs like you, head over to Smallstarter.com to join our private community. See you inside.