How to Successfully Workout a Loan
For a business that is struggling, renegotiating the interest rate and terms of a bank loan may be possible. Here are some tips on how to go about doing that.
Life for businesses has improved significantly during the last year, but owners are still facing challenges with their commercial loans, especially older loans with terms that do not match the reality of the marketplace. For many businesses, the mortgage on its property or its working capital line is its largest liability, and may be dragging down the owner’s ability to expand or even maintain operations.
Generally, business owners should be proactive and stay in open communication with their lenders. If you anticipate that the business will have stagnant or deteriorating results in the near term, approach the lender and work on a modification before a missed payment or other default. Once an event of default occurs, the situation is trickier for the borrower to maneuver, because the lender usually has a wide array of remedies (including the termination of your right to future advances, the charging of default interest and penalties, and foreclosure on the collateral).
Some tips to remember when talking to a lender, broker or any other agent of the bank:
• Document all your in-person and telephone conversations with the bank, including dates and names, either with a follow-up email or certified letter. There are many stories of borrowers who thought they were “negotiating” with their bank, only to find out that a foreclosure or a lawsuit had been filed against them during the process.
• Do make sure the mailing address and email that the lender has on file is valid and that a reliable person is receiving mail at that address.
• Be ready to provide the lender with information on the business and your personal finances (if you have provided a guarantee). Some common items that a lender will request are the nature of the hardship that has led to the inability to pay; the value of the business or the property that is securing the loan; the future financial prospects of the business; and all current financial statements and tax returns.
• Don’t expect something for nothing. It is unlikely that a bank will modify the loan or release a personal guarantee without getting a major concession in return.
Many borrowers think they can just walk away from the loan without any consequences. Unfortunately, it is not that easy. Realistically, most loan workouts usually have one or more of the following components:
1. Missed payments, including interest and penalties, are added to the existing loan balance;
2. The interest rate is modified, even making an adjustable rate into a fixed rate;
3. A short-term waiver of principal and/or interest payments; or
4. A loan extension that allows for a lower monthly payment.
How the loan workout is structured will depend on the severity of the default and the future prospects of the business. On one hand, the matter might be resolved with a relatively simple waiver and/or amendment to the loan documents. On the other hand, the default may provide the lender with an opportunity to foreclose on the loan and go after both business and personal assets.
In the case of a modification, you will want to ensure that all defaults have been irrevocably waived and that the newly amended loan allows you to operate in a solvent manner. The more uncertain your circumstances, the more likely it will be that the lender will insist on other concessions (such as a capital infusion to reduce the amount owed to the lender, higher fees, etc.).
A lender may also agree to a forbearance, agreeing not to take any actions on the default for a stated period, so long as no new events of default arise. This gives a borrower time to refinance with another lender or find a buyer for the business. When a business loan is in trouble, it is best to address the situation head on before the situation worsens. If a default has already occurred, approach your banker quickly and with all the information that they may need to help you work out the loan. Finally, be prepared to find another loan or consider a sale of the business if a deal cannot be made with the current lender.
[Business Insights is hosted by the Law Firm of Kumar,
Prabhu, Patel & Banerjee, LLC.
Sonjui L. Kumar is a corporate, transactional attorney and a founding partner of KPPB Law.
Fareed Kaisani is a JD/MBA student at Georgia State University and a law clerk at KPPB Law.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.]
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