Think about this old adage - you borrow dollars but pay back pennies. It's true isn't it? Businesses obtain loans for many legitimate reasons such as new equipment, vehicles, acquisition of real estate, building construction and others. Loans for these purposes are frequently set up on fixed monthly payments and are designed to either amortize fully over the life of the loan, or go to a pre-determined date at which time a balloon payment of the full remaining principal balance and all accrued and unpaid interest is due.

Businesses also borrow on short terms as working capital financing. Loans of this type may speed up cash flow since they effectively become faster collection of receivables. Or, short term loans may be used to take advantage of unusual buying opportunities, seasonal needs or other legitimate current purposes.

What happens, though, when the contract (loan) terms cannot be met? Without an advance agreement from the lender to modify terms if necessary...and such an agreement is frequently difficult if not impossible to obtain...the payments will not be made and the loan(s) will go into default. When that occurs, life can become very unpleasant very rapidly.

At the worst, a business may lack any inside or outside resources to catch up payments or otherwise cure the default. In that case, the delinquency caused by the default will continue and the business' credit and other financial standings could suffer. A previously attractive business may not find replacement financing available at any reasonable cost, if at all. The longer the default exists, the more strained the borrower/lender relations will become. Refinancing or restructuring possibilities will become increasingly limited and the problem will continue to worsen.

With passing time and continued default and delinquency, the lender(s) may feel that there are no alternatives except acceleration and demand for payment in full. If the business fails to pay as demanded, the creditor may file a law suit to collect the loan and recover the collateral. Once a law suit is filed it becomes public record. Because of the public nature of the information, businesses who have been sued may find it increasingly difficult to obtain other financing. In other words, fixing the problem becomes more difficult. Consequently, operations
may have to be curtailed, cash flow will continue to suffer, repayment ability becomes more impaired, bankruptcy may be on the horizon...everything gets worse.