by A. Barry Cappello
Businesses with troubled loans are in a unique position
today. In the 1980s and a good share of the 1990s, lenders were quick to
foreclose on non-performing loans. Now, with the economy in an extended boom
period, lenders are much more inclined to work with borrowers that experience
temporary financial troubles rather than face the prospects of adding
non-performing debt to their bad loan portfolios. For businesses that need extra
time or relaxed loan terms to resolve relatively minor financial problems, a
loan workout is an appealing option. The key is to negotiate the most favorable
without compromising your legal rights.
Deciding to Renegotiate
Deciding whether renegotiating a loan makes sense for the company is the
first step one should take before approaching a lender. The alternatives—losing
collateral, facing foreclosure, filing for bankruptcy—are not appealing.
However, if renegotiating a troubled loan will still not enable the company to
pull through its tenuous situation, there is no sense beginning the process.
"Buying time" is not a viable reason to approach a lender with a workout plan.
Have an outside CPA review the companys financial records to determine if a
more attractive interest rate or a grace period will be enough to salvage a
loan. If not, it may be time to face reality and hire a business law attorney to
represent the company through legal proceedings.
If there is a legitimate possibility that the loan can be kept current with
new loan terms, the best time to approach the lender is before the company falls
behind in loan payments. Lenders may not be happy to hear that a borrower is
having financial troubles, but they would rather be told before a loan is 60
days or more past due and their calls to the company go unanswered. Contact the
lender about the companys situation before the lender begins sending past due
notices and threatening letters.
Prior to meeting with the lender to begin workout discussions, the company
will need to prepare materials convincing the lender that extending loan terms
is in its best interest. The company must compile financial data including
detailed profit and loss information, assets and liabilities, inventory (if
applicable), marketing data, short-term (three-to-six months) and long-term (six
months-to-three years) cash flow projections and a business and marketing plan
that shows how the business will meet its current and future financial
obligations. Almost as important, the company must explain why the current
financial problems exist and outline a realistic game plan will ensure that the
problems will be corrected and not recur.
The companys accounting department should be able to prepare the financial
documents. Another helpful source is a loan consultant, often a retired senior
bank loan officer, who knows what lenders are looking for in workout plans.
Lenders also look at a companys management team when evaluating whether to
renegotiate a loan. They look at its experience, commitment to the company,
honesty, integrity, long-term business planning ability and competency. Once the
materials are compiled, be prepared to act quickly. Every week that goes by
without contact with the lender will hurt the companys cause.
Often, borrowers come to the negotiating table with their hat in hand, ready
to accept any new terms offered by the lender. This is not advisable. Accepting
terms that will not help the company through the financial rough spots but will
only delay the inevitable is of no value. Determine ahead of time the new loan
terms that will enable the company to pay back the loan in a timely manner. Know
in advance what will work and what wont. Once these are determined and the
financial and marketing materials are compiled, it is time to plan a meeting
with the lender.
Liability of the Lenders
Although financial institutions have become much more vigilant in respecting
borrowers rights, some lenders still make mistakes that lead to a borrowers
financial problems. Courts have ruled that lenders are accountable when lender
misconduct adversely affects a borrowers financial position. If lender
liability is present, a company can negotiate a new loan from a stronger
position. Faced with a legitimate lender liability claim, financial institutions
may be much more willing to negotiate favorable new loan terms with the damaged
Signs of lender liability include lender conduct such as forcing the business
to operate in a certain manner to keep borrowed funds flowing; adding new loan
conditions after the business has accepted the original terms; improperly using
acceleration or demand clauses; failing to provide adequate notice before
changing the way it does business with the borrower; calling a loan due without
giving a company time to find a substitute lender and putting off the loan
process or holding the borrower in limbo so an unreasonable amount of time
passes and the business suffers as a result. If the lender sees that its conduct
is suspect, it will most likely want to renegotiate a loan to avoid a possible
Lenders know that borrowers at a workout negotiation are in a vulnerable
position. The entire business may be riding on whether the negotiations are a
success. A typical concession lenders seek from borrowers is the insertion of an
arbitration clause in the new loan documents that waives the companys right to
a jury trial. Lenders may also demand that the borrower waive its rights to any
lender liability or other claims against them. Before agreeing to these
concessions, the company must consider the ramifications (i.e., forgoing any
ability to seek future legal recourse against the lender).
During workout discussions, everything is negotiable—interest rates, monthly
payments, length of the loan, collateral, payment schedules and technical loan
covenants (i.e., debt to equity ratios). Lenders usually try to obtain
additional security or collateral for the new loan to better protect themselves
from default. Companies should be firm on what they are willing to give up to
receive better loan terms. Putting up personal property or investments of the
companys principals (i.e., a residence or real estate), for example, should
only be considered if the principals are willing to lose the collateral if the
worse case scenario plays out.
Depending on the complexity of the workout, a company may need an entire set
of new loan documents or it may only need some amendments to existing loan
agreements. Regardless, the company should be prepared to pay renewal or
rollover fees to the lender for changes in the loan terms. If the lender
requires the services of an attorney, the lender will often require borrowers to
pay any lenders attorneys fees.
As is always the case, borrowers must make sure that all of the lenders oral
promises or commitments made during the negotiations are documented in writing
in the loan papers. Without written documentation, those oral promises may be
worthless when the company later tries to hold the lender to them.
Thorough preparation, a realistic short-term and long-term turnaround plan
for the company and tough negotiation skills are critical if a company is to
succeed in the workout process.