Why an Alternative to Litigation is better for Lenders and Funders:
Over the past couple of years, I have seen more and more that microcap lenders are suing microcap companies that have defaulted on their loans. This is a trend and those lenders who have not started litigation against clients who are in default are strongly considering it. Is this really the best answer? If a lender sues and wins against a microcap company and/or the CEO who personally guaranteed the loan, who really wins?
Many of these loans are tied to company assets already. Most microcap CEOs I know who have guaranteed loans are so broke they can’t even pay attention. The company and the CEO have no means to repay the loan, so is it really worth it to sue? What if the companies who are in default were able to get themselves back on their feet and provide a means to pay back their lenders? This is possible through a restructuring.
The restructuring has to be done in the correct way however. A proper restructuring of a microcap company would involve converting all (or most) debt into a preferred class of stock. Other debts would be converted into a different class and so on. With a reasonable cap structure post-restructuring and traditional, long term funding in place, the company will be able to proceed on execution of their business plan.
The only drawback for lenders is that it requires you to take a longer view and essentially become an investor in the company. It’s a much better alternative than a lawsuit whereby you might take over some assets or beat a few dollars out of a broke CEO.
Other key benefits of a company restructuring is:
Restructured companies stand a much better chance of increasing in value in the marketplace. Investors of microcap stocks have realized that the only way their investment is going to appreciate in value is to invest in a company that is not doing any form of significantly dilutive financing such as debt financing.
Restructured companies with little or no debt are much better sells to Investment Banking Firms that we introduce them to.
Lender/Funders essentially become investors in the microcap company once restructuring is complete. This possibility exists that they could not only get 100% of their money out of the restructured microcap, but stand a chance of making more through their “investment”.
A restructuring and workout is much better for all involved; only the attorneys make out and win in litigation cases against microcap companies.
Several funders who see the value in what we are doing have already approached us. They realize that the path of least resistance is actually a longer path but creates a win-win for everyone involved.