Business Loan Workouts
Small business borrowers with troubled loans have quite a bit more leverage than they once did. Lenders once were quick to foreclose on non-performing loans; but after years of multi-million-dollar verdicts against them for "lender liability," they are much more inclined to work with borrowers to see that loans are repaid. For businesses with only temporary or relatively minor financial problems, a loan "workout" or debt restructure is a great option. The key is to negotiate the most favorable new terms without compromising your legal rights.
The following information will help you better understand your options as a small business borrower when repaying a loan becomes problematic. See FindLaw's Loans and Investors section for additional resources, including Ten Things to Think About: Your Bank Loan.
Contact Your Lender Before They Contact You
The first step of any successful workout is to convince your lender you can ultimately pay off the renegotiated loan. You must show the lender how a workout arrangement is in their best interests. If convinced, a lender may be willing to reduce the interest rate, reduce monthly payment amounts, or change other loan terms.
Many borrowers make the mistake of waiting until their lender starts sending demand letters before suggesting a workout plan. But putting this off until your business is no longer economically salvageable implies that you did not adequately anticipate or prepare for current financial difficulties. In the lender's eyes, this does not bode well for the company's future financial viability and offers little incentive to the lender to continue the relationship.
By contacting the lender early, lenders are more likely to go along with a workout plan if non-financial factors are strong within your company. They look at the management team's honesty, integrity, long-term business planning ability, track record, and competency before making a decision
A successful workout begins with thorough preparation. You need to identify problems within your business that may have caused the financial problems and develop solutions prior to approaching the lender..
Present to the lender reliable, professionally-produced analyses and projections in order to prove that you have fully analyzed the financial situation and have addressed any underlying problems that are negatively affecting the performance of the business. The documents should include short-term (three-to-six months) cash flow projections, financial trends and a workable business plan under the proposed new loan terms. Ideas to increase operational efficiency or increase sales should also be included.
Enlist the help of your auditor or accountant to prepare the financial documents needed for the workout package. Loan consultants, many of whom are retired senior bank loan officers, can also help put together the proposal. Make the request for a workout session only when the presentation materials are ready for the lender's review.
If your financial investigation shows that the lender's actions actually led to the company's financial problems, you can negotiate a new loan from a stronger position. If the lender sees you have a legitimate "lender liability" claim, your legal counsel can usually persuade even the most inflexible bank to negotiate.
Here are some signs of lender impropriety. The lender:
- Tries to control aspects of the business;
- Adds new conditions to the loan after the business has accepted the original terms;
- Improperly uses acceleration and demand clauses in the loan documentation as a means to ensure compliance or punish the business;
- Fails to provide adequate notice before a change in the way it does business with you, or calls a loan due without giving your company time to find a substitute lender; or
- Stalls the loan process so an unreasonable amount of time passes and the business suffers as a result.
The presence of one or more of these scenarios could enable you to come to the workout negotiating table without needing to make major concessions. If the lender realizes it is guilty of some kind of misconduct, it will most likely want to make corrections to avoid a possible lawsuit.
Ideally, your attorney should be familiar with lender liability law so you can more readily spot possible lender misconduct while reviewing the history of the loan. You will also need to evaluate the strength of the potential lender liability claim.
Be prepared to respond to whatever loan revisions the lender may suggest. Lenders know borrowers are usually in a vulnerable position during workouts, and may try to extract unwarranted concessions. A lender, for example, may insist that any new loan documents include an arbitration clause that waives your right to a jury trial.
Another commonly sought concession is a release by the borrower of any lender liability or other claims, but you must consider the consequences of the decision (i.e., whether to accept new loan terms offered by the bank but forfeit the right to sue for an existing lender liability claim). This decision may depend on your prior review of the strength of the lender liability claim versus the likelihood of turning your business around under the terms offered. Don't be overly optimistic, and give yourself plenty of time to meet the new terms if you choose to give up your legal claims.
In loan workouts, almost everything is negotiable: loan length, interest rates, payment schedules and technical loan covenants (i.e., debt to equity ratios). You may need an entire set of new loan documents or, if the changes are minor, amendments to existing loan agreements will do. You should be prepared to pay renewal or rollover fees to the lender for changes in the loan terms, and lender's attorney's fees incurred in the workout.
It is imperative that all oral promises or commitments made during the workout are documented in writing in the loan papers. Without written documentation, those oral promises may be worthless when you later try to hold the lender to them.
See Loan Package Documents and Information to learn more about debt financing.
Fighting The Lender In Court
Not all workouts are successful. If negotiations fail but clear lender misconduct is present, you and your legal counsel must determine whether it is worth the time and money to fight the lender in court. Make sure you haven't signed a legal release before considering lender liability claims.
Because the time and money needed to bring a lender to court on lender liability claims is considerable, suing your lender should only be used as a last resort. Most lender liability attorneys urge borrowers to exhaust every alternative means before considering litigation. If the case is strong, many lender liability attorneys will take the case on a contingency fee basis, but the borrower may still have to pay legal costs such as expert witness fees.
Workouts, unlike legal action, can make winners out of both lender and borrower. But a workout should only be considered when it will mean that the business can remain viable and it can pay back the loan in a realistic manner.
Small business owners considering their options may benefit from consulting with a business and commercial attorney for additional guidance.