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By Jim Mosqueda

financial condition, arrange for new sources of capital and settle litigation out of court. Creditors welcome out of court settlements since it means getting cash sooner, with greater certainty and reduced attorney fees. At the end of this process, the restructuring firm renews the viability of the debtor business in a lower cost fashion compared to litigation. Even during prosperous economic times, a business may fall behind with debts. If I had to describe an anatomy of small business path to litigation it occurs something like this:

Small Business AND Debt


n a typical month, there are 100 contractbased civil suits brought against businesses in St. Louis. This does not include litigation in the adjoining Illinois counties. In a recent issue of the St. Louis Business Journal, there were 50 entities facing federal tax liens and 30 facing state tax liens. A small business facing litigation has several choices. Business owners may ignore the suit hoping it will go away – it won’t. The outcome of this choice will be a default judgment. Many business owners act reflexively and hire an attorney. It does not send the best message to a creditor that there are funds available for an attorney but not to pay a debt. An often ignored point about hiring an attorney is that frequently there are no substantive legal points to discuss in court. Typically, there is no disagreement that money is owed or the amount owed. If a business chooses to go to court



In my business restructuring practice I witness the struggles of small business on a daily basis. Cash flow and undercapitalization are the main culprits and often there is a definitive path towards the proverbial financial cliff. under these conditions, understand what a loss entails. A loss means liability for the original debt, defense attorney fees, interest charges, court costs, interest on unpaid balances that can be as high as 18% per annum and plaintiff attorney fees. A legal challenge could take as long as one year. Such an outcome can be a death knell and eventually lead to bankruptcy. Some businesses will deal with a creditor directly or negotiate with the creditor attorney. This is an emotional proposition for a small business debtor. Negotiations are difficult and time consuming. Small business owners often lack the expertise to settle such matters even if they purchase do-it-yourself courses costing hundreds of dollars. Another path is to engage the services of a business restructuring firm that will holistically evaluate the small business’

1) 1/3 of accounts payable are overdue by more than 90 days 2) Debt payments skipped to meet payroll 3) Collection letters from suppliers There are a myriad of reasons why businesses fall into this track. Some of these reasons can be personal or attributable to unforeseen circumstances. Sometimes it may be the fault of a customer or a supplier. There are also managerial reasons. A market tells you what it needs but you have to ask and listen. The business also has to define and articulate its value proposition. Zappos is a textbook case. They threw up an online store with images, gauged the response and initially fulfilled with retail inventory (ask & listen). They gave customers the ability to try shoes at home and return them without charge. This created the instore experience without venturing to the mall (value proposition). Small business failures don’t make the nightly news. At a minimum, small business comprises some of the pistons of the economy’s engine. We should root for the small entrepreneur. Remember that big companies were once small companies. Jaime Mosquera is a Principal at Sentinel Consulting, a business restructuring firm. He is also the author of E$caping Oz: Protecting your wealth during the financial crisis. He operates the financial and economic site (

En Contacto Fall 2014  
En Contacto Fall 2014