At some point in time, many businesses and business owners like Bob Businessman find that they are not in the best position or relationship with their lender(s). A cash flow deficiency may have caused loan payment defaults; financial covenants may have not been met; the loans may be in good standing, but the lender may not be willing to renew them; or problems may not have arisen yet, but there is a risk they could.
After default and acceleration of the debt, a lawsuit or foreclosure could commence at any time. To avoid these situations if possible, and to deal with them better when they arise, follow these principles:
Give Proactive Attention. Review loan documents before signing them. Review the loan requirements and your company’s financial condition, prospects and ability to maintain its credit facilities in good standing. Deal with loan defaults immediately when they occur. Consider what your company’s alternatives may be to (a) recover from defaults and continue with its current lender; (b) obtain lender waivers and forbearance during the default; (c) restructure the business and its credit facilities; or (d) close the business in an orderly way.
Plan Then Act. When your company’s financial condition deteriorates, act quickly to identify all your options. Hire a consultant if you are uncertain what to do. Immediately engage an attorney experienced in working with lenders on behalf of borrowers experiencing financial difficulties. Do not hesitate. Do not “wait and see.”
Communicate, Consult, Communicate. Good times or bad, spend the time and money to keep your trusted advisors (attorney, accountant and other business advisers) informed about your business. Seek their advice early and often. Communicate with key employees to obtain their input, encourage their loyalty, and make them members of your “solutions team”. Communicate proactively with your financial lender and other creditors—but only after consulting with your attorney and other trusted advisors. You may not be able to distinguish between what is prudent and what could be imprudent—or worse, disastrous.
Every communication with your lender should be vetted and planned. Determine whether your attorney or you will be the primary contact with the lender. Avoid any form of adversarial communication. Make the lender’s representatives themselves members of your workout team.
Educate. Tell your story, inform the lender about your workout plan, seek input from your lender, and seek the active support of your lender within its institution for approval of your workout plan. Be specific about every element of loan accommodation and business action involved.
The Documents Govern—But They Don’t Have To. Your lender’s starting point is based on what your loan documents require. Show your lender what requirements can’t be met and why. Show why strict compliance should not matter under your plan. Seek a “forbearance agreement.” This is a written understanding with your lender which acknowledges loan defaults and allows them to continue without the bank taking action against you provided you are able to meet agreed requirements and goals.
Be Realistic. Your company’s financial difficulties most likely arose because its “old plan” failed or no longer fit the circumstances. Something has to change. “Stay the course” is not an option. Make sure your lender has the same understanding. Be realistic with yourself and with your lender about what is viable and what is achievable.
Show Your Lender Why You Offer a Better Alternative. Lenders understand the disruption, costs and unsatisfactory recovery outcomes that can result from treating a borrower adversarially. If your company can survive, show the lender how it will achieve a better financial result through your company’s business reorganization and credit facilities restructure proposal. If your company can’t survive, show the lender how it will achieve a better financial result by leaving the company and you in operation and control either (i) to sell the company, or (ii) to maximize receipts and liquidation proceeds during a wind-down period.
Know When To Quit. Keep asking yourself “Is it time to quit struggling for survival, and instead prudently unwind?”
Take Care of Yourself. Dealing with a financial crisis can inflict a heavy personal toll. A company owner’s maintaining her or his physical and mental health during a time of crisis is essential. Remember—you will survive. To paraphrase a recent movie quote: “All things end well. If things are not well, it is not the end.”