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In Times of Crisis, Should I Default on My Debts?

By Fernando Padilla - Pretmex
CEO & Founder


By Fernando Padilla | CEO - Tue, 04/05/2022 - 09:00

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There is a rather controversial issue that never goes out of fashion and that in Mexico has become a habit. The famous, "Debo no lo niego, pago no tengo," which means, "I owe, I don't deny, I pay, I don't have."

What happens if my company is facing liquidity constraints, and this is causing me to fall behind on my financial obligations? From the payment to distributors, employees or lenders, what to do in those moments when your cash flow is so stressed that you cannot fulfill your obligations and at the same time keep your business afloat?

The first thing to understand is that there are crises all over the world, all the time. Sometimes, there are health crises, national crises, economic crises and even internal crises within the organizations themselves: with employees, financial losses or with top customers. But this is part of every company and of life as well. 

What is important is how you face and solve these crises. This can determine the success or failure of your company.

Today, I am going to explain five strategies that you can follow in those moments.

1. Know that all crises are temporary 

Having a business crisis leads almost automatically to catastrophic thoughts: "I'm going to go bankrupt," "I'm going to lose everything." It is true, there is that risk, but in most cases, it does not happen that way and even less if you make the right decisions, implement the right strategies and understand that you are not the only businessman facing and solving this situation.

If you lose a client, mobilize your resources to get new ones, solve your internal situation step by step, involve your personnel and take focused actions. Take care of what you have in your hands; what you can't solve will eventually pass.

You should also learn to make decisions with the future in mind, anticipate crises that may approach and foresee them with contingency plans.

2. Accept reality 

You are indeed in a crisis. It is indeed affecting your liquidity and it is indeed affecting your commitments and obligations. The worst thing you could do is to deny that reality but many businessmen do. It seems easier to look the other way while this is happening. It is a mistake because the situation does not go away but increases if you do not take action.

Ignoring the situation will only bring you more problems. I have seen cases of debtors who prefer not to answer the phone or e-mail messages, and even train their entire company to learn to ignore them. From my experience, confronting the problem opens opportunities to solve the problem, it opens spaces for negotiation, debt relief, and agreements. Anyone could easily understand that you are going through a crisis but not that you are avoiding it or refusing to pay.

Face your debts with professionalism, establish a plan and deadlines and try to follow them.

3. Reach out to negotiate

You may be facing financial problems that prevent you from meeting your obligations but this does not excuse you from covering them. No company or financial institution can sustain a lack of payment from its clients, which is where negotiation comes in. You must get to your suppliers, creditors or employees to explain the situation. If you owe them 10, tell them that you are in position to pay one. Maybe they will tell you that one is not enough, that they require a written plan or a guarantee. The idea is not to hold onto your offer but to bargain.

Settling debts is better than refusing to pay. Stick to alliances, suppliers and the reputation that you have been building up over time, even in the face of contingencies. Crises are temporary but your conduct will stick.

When you do things correctly with the distributor, the financial institution and the employee, to whom you honored your commitments and proposed a plan and fulfilled it, when the crisis is over, when you want to do more business, when you want to negotiate better conditions, when you ask for more credit or time, they will come back to support you.

Having your own company goes both ways, one day you might be the debtor but the next day you might face a debt situation. With this perspective in mind, remember to try and solve the situation as you would like others to solve it for you.

4. Keep your credit history healthy

Financial institutions in Mexico and around the world generate credit records that are reported to credit bureaus (Buró de Crédito or Círculo de Crédito), which are the designated entities in Mexico. There is one in every country and they keep your track of your credit report, your rating, and your behavior. It will show if you defaulted on your debts or honored them, or if you received a debt settlement during good times or despite a crisis, and whether you solved the problem or not.

This means that bad financial behavior will leave a scar on your company's reputation. Ratings will vary with your payment behavior in spite of the crises. At some point and over time, this mark may be erased. Make sure your situation is as smooth as possible so that you can recover your financing options as soon as possible.

Every successful company that needs to grow has done so in the company of a financial institution. It is the smart way to grow, finance and obtain your production equipment. That is why it is necessary to take care of your record and not to obtain money only from partners, which is not beneficial for your company.

Nowadays, credit reports are not only used to give you financing; in many places, they are used for hiring, obtaining funds, qualifying for a bidding process, complying with regulations, to see how you behave and how responsible you are with your obligations. That is how they evaluate you.

5. Don't stop selling 

I don't know why companies stop selling in times of crisis. They are so stressed about getting out of the crisis, about having no money or having to negotiate with all their creditors and suppliers that they stop paying attention to the most important thing. 

What will get you out of any crisis, what will solve your problem with all your debts and will help you to fulfill all your obligations is precisely selling. This is the time to reinforce your sales strategy, increasing it by 10 times more than what you were doing.

If you used to contact 10 clients to sell one, now you must contact 100 to sell 10. The strategy will always be to make 10 times more effort than you did before. Do not stop selling. If this crisis has closed the possibility of selling as you did before, do not wait for this temporary crisis to end; innovate, create new ways of selling and find new forms of income.

It may seem obvious but with further analysis, the only thing you need to get through the crisis is more sales. If you focus on that, liquidity will come and maybe it will lead you to end the crisis early.

I hope you are not living through a crisis. But now you have tools that can help you get through such a situation. And even if you are not living it, it never hurts to have contingency plans.

Photo by:   Fernando Padilla

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