Owning and operating a business in Arizona is a complex, stressful experience. Financial distress often is part of the landscape. Knowing when financial problems should be discussed with a bankruptcy lawyer or professional may be an important survival tool.

Bankruptcy lawyers who advise businesses know there are often telltale signals for when a business needs financial counseling, including bankruptcy advice. All too often, a client meets with a bankruptcy lawyer only after exhausting all other avenues and assets, leaving liquidation as the only alternative. It is better for the client, better for the creditors, and better for the lawyer to have an earlier, rather than later, conversation.

Here are some of the signals for when you may want to talk to a professional - lawyer or financial advisor - familiar with bankruptcy:

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• Lack of available cash flow. Any American business - whether a restaurant, sales company or manufacturing concern - lives or dies on its operating cash. Chronic lack of available cash flow is a critical sign of financial distress. By available cash flow, we mean cash that is available to operate the business. A business that cannot reliably predict its cash flow for 30 to  60 days needs to get smart and build a reliable cash flow model. Available cash flow does not include diversion of trust funds, mishandling of customer deposits, or failure to pay withholding or other trust fund taxes. A bankruptcy lawyer can be hired to work with a client with cash flow problems to identify the causes of the problems. If a manufacturing business consistently loses money producing widgets in an expensive factory, bankruptcy can help shut down the unprofitable production, breach the related contracts, and allow the damages to be spread across the pool of unsecured creditors, while the business’ profitable operations generate repayment for creditors.

• Overleveraged assets. Where a business’ secured borrowings exceed the value of collateral, or violate debt service covenants, the business will lack access to borrowed capital and likely face secured loan defaults and foreclosure. Broad overleveraging of assets suggests either lack of profitability, lack of integrity, or both. A financial professional can help a borrower with secured debt issues work to obtain covenant or other loan relief so secured debts are not in default. If additional collateral is pledged, the existing lenders may provide meaningful relief rather than taking all of the available collateral, and then inevitably enforcing the defaulted loans. The threat of bankruptcy can help breach the gap between the possibility of additional collateral or debt reduction and the demands of an overly aggressive bank or other lender.

• Irrational creditors. Every business activity has some element of risk. Sometimes, a business’ financial problems stem from an accident or an economic injury resulting in massive litigation exposure as well as expense. Legal counsel representing an alleged victim being compensated on a contingent fee basis may have a completely different set of expectations of payment than the trade creditor seeking to work with an important but financially distressed customer. A bankruptcy lawyer may be able to provide perspective in settlement discussions or alternatives to lengthy, expensive litigation that may bear with it the risk of extreme, adverse publicity to a business’ good will.

• Loss of a critical customer or market. Smaller businesses face particular risks of dependence upon a particular customer or market. A cabinet maker whose main customer is a homebuilder may be devastated if the builder fails. A strip mall landlord is hurt when an anchor tenant closes. A bankruptcy lawyer can help counsel a business owner in the time of a catastrophic loss of a customer or market about alternatives. Too often the business owners invest everything available in trying to keep the business afloat without recognizing and reacting to the structural damage caused by the loss of a customer or market. Bankruptcy can offer such a business the opportunity to aggressively downsize and recapitalize its changed business plan rather than continue to pour money down the drain.

• We’re in a recession. Each of us has experienced how the current economic recession was perceived by particular businesses, communities and markets. Some folks reacted; others hoped the troubles would go away. A business owner who appreciates a significant economic change generally, and quickly reacts to the change by seeking accommodations from lenders, landlords, and vendors has an opportunity to restructure a business before all other options are exhausted. The first borrower seeking a restructuring from a small bank in a declining market may be able to achieve real debt modification. The later borrowers may be dealing with the Federal Deposit Insurance Corporation or other receiver for the failed institution. When the business owner is experiencing market decline, exploring options promptly with a restructuring professional may be the difference between fixing a distressed business and become a participant in yet another foreclosure or liquidation.

• Need to sell the business. Similar to a homeowner who is upside down on a mortgage loan, businesses often need to be sold but cannot due to excessive secured debt. Many lenders will not even discuss a problem loan until it is in default. Yet default may impair credit or trigger lender over-reaction. A bankruptcy lawyer can help a business navigate a sale needed to preserve the going concern before it loses the ability to keep the doors open.

Early consideration of bankruptcy is a critical tool every business owner must consider when facing these or similar signs of financial distress.

Contact Rob Charles, an attorney in the Tucson office of Lewis and Roca practicing in bankruptcy law, at RCharles@LRLaw.com.