Head in the sand, or how businesses can avoid bad debt

Many entrepreneurs in Ukraine will again find themselves in a situation where it is difficult for them to repay loans due to another lockdown. As last year’s practice showed, the first people who suffer from increased quarantine conditions are cafes, restaurants, hotels, as well as entrepreneurs working in the field of sports, beauty and other types of services. Andriy Volkov, founder and partner of Investohills group of companies, told for Mind what to do for such a business so as not to spoil its credit history and lose its collateral.

How do debts appear?

First, let’s determine what are the general reasons for the emergence of debts for entrepreneurs, in addition to quarantine.

They can be divided into three groups.

* The first is businessmen who simply do not want to pay off loans. Here we are talking about scammers who initially did not intend to pay off their debts and understand that it is very difficult for the bank to recover their debts. There are not so many fraudulent borrowers among entrepreneurs in Ukraine. There are much more of them among ordinary individuals who take out loans. But it would be pointless not to take them into account.

* The second group consists of entrepreneurs who find themselves in a difficult situation due to the fact that they incorrectly calculated their business plan or took out too large a loan and cannot repay it. There are already significantly more such borrowers than scammers.

* The third group consists of businessmen who have been affected by the external environment. These entrepreneurs have been successful in the past, but something unusual has happened in the world or country where they do business. For example, COVID-19, then lockdowns, falling incomes among the population, and so on. For most cafes, restaurants, cinemas, etc., all this has become exactly the external environment that has led to the fact that businesses have stopped servicing loans. Unfortunately, this group includes most entrepreneurs who are in arrears on loans.

At what point does the loan become problematic?

As soon as the debtor ceases to fulfill its obligations under the loan agreement in full. That is, even a delay in paying interest for a month or their incomplete payment is already a serious problem. If the borrower disrupts the loan repayment schedule systematically and allows a long delay, this may be the basis for compulsory debt collection.

How not to lead the debt situation to a dead end?

If the borrower does not belong to the group of scammers, he himself strives by all means to avoid an extraordinary development of events.

A bona fide debtor should consider what it can actually repay and in what mode. That is, to develop for yourself some feasible plan for getting out of the situation. After all, the lender is also not interested in fighting the entrepreneur and poisoning his life.

The bank wants to get its money back with interest. But if the situation is difficult and occurred for reasons beyond the borrower’s control, then the lender can meet you halfway. And, as practice shows, a compromise is possible in most cases.

How do I negotiate with the lender?

The easiest option is to achieve installment payments, that is, an increase in the term of the loan. You can also agree on a reduction in the interest rate. In more complex but reasonable cases, it is even possible to write off part of the debt.

In addition, the bank may offer the borrower to sell their property or collateral to pay for the loan. And if the value of the collateral is greater than the loan amount or almost the same as the amount of debt, the lender is likely to insist on this scenario. Especially if the entrepreneur has no other real plan to get out of the situation.

When does compulsory debt collection occur?

If the lender cannot find a common language with the entrepreneur for a long time, it resorts to legal action. It is in this case that compulsory debt collection occurs. The bank simply sells the right of claim under the loan agreement to a company that specializes in dealing with problem debts. A similar fate applies to loans that are more than a year overdue, when the lender itself tried to collect the debt and realized that this is a difficult and sometimes unpromising path.

Of course, the process of enforcement can be stopped. And there are two ways to do this. The first is various tricks that cost the borrower a lot of money, but do not guarantee the outcome of the situation in his favor and simply delay the inevitable. We are talking about judicial denial of loan agreements, withdrawal of property from collateral, and so on.

The second method is the most common among businessmen. This is going into bankruptcy. Both a legal entity and an individual can declare bankruptcy. At this time, the enforcement process stops and another procedure is started: an arbitration manager, a property liquidator are appointed, and the property is sold. All this helps to delay the collection for at least six months.

However, some entrepreneurs, especially on the advice of lawyers, organize fictitious bankruptcy. But, as our experience of working with such borrowers shows, this is only wasted money and time, because everything will end up with the collateral being sold, and the credit history will be completely damaged.

It is best to stop compulsory recovery voluntarily, by agreement with the lender, by entering into negotiations with him. Moreover, this can be done at any stage – both when the case has not yet reached the court, and when enforcement proceedings are opened.

But, of course, the sooner the better. When legal battles are in full swing and the property is seized, the borrower will only be able to buy back their assets in order to somehow close the debt. If you go to negotiations at the very beginning or in the middle of the road, then it is quite realistic to agree on writing off part of the debt, on some kind of installment plan, and so on.

So don’t be afraid of loans. When some people say that I built my own business and never borrowed a penny from anyone, it’s quite strange. There’s nothing wrong with a loan. It helps businesses develop, scale, and enter new markets.

But if something goes wrong with debt, you don’t have to wait until things get really bad. It is necessary to go to the bank and negotiate, explain the situation. I repeat, the most important thing for an entrepreneur is to show the lender the real situation and want to solve the problem.