In the banking world, a special assets department is setup to monitor and/or liquidate loans made to financially struggling or troubled companies. Banks send their troubled commercial loans to this department to handle the negotiation and management of the bank’s forbearance agreements.
Many business owners unknowingly think that when their loans are sent to the bank’s workout group that the bank desires to work things out with the business owner, but this is not the case. Instead, the bank wants to erase the loan from their books. The bank accomplishes this by imposing specific goals that the business owner must meet within a specific time frame. While the business owner works to achieve meeting the defined goals, the bank will forbear calling the commercial loan or foreclosing. The forbearance period is finite. If the business owner is not able to meet the terms of the forbearance agreement within a defined period of time, the bank will impose its remedies against the business.
What to Expect Next
- Your lender will increase reporting requirements – If your loan is secured by the company’s receivables and inventory, expect that your lender will increase the reporting requirements. Monthly reports will be changed to weekly. As excess availability under the lending line gets tighter, your lender may even request daily reports. In addition to more frequent reporting requirements, the bank will likely also increase the frequency of field exams, physical inventory counts, appraisals, and testing of receivables to estimate the percent of recovery in the worst-case scenario if the company stops operation and has to liquidate.
- Borrowing costs will increase – The bank will likely impose fees for granting waivers or forbearance from immediate foreclosure. Expenses for the bank’s attorney to prepare documents will be charged to the company. There may an automatic charge of a default interest rate. The costs for appraisers, examiners and other professionals will also be charged to the company.
These unexpected costs are encountered exactly when the company can least afford them, but from the lender’s perspective, it is being compensated for its increased risk and costs of managing a loan to a company experiencing financial grief. If the company is able to secure replacement funding from an alternative source, you should expect that lenders who are more risk-tolerant to charge higher rates.
- Full Cooperation with your bank’s examiners and financial advisers – Not fully cooperating will only end up costing more in the long run, and further jeopardize the ability of the company to survive. Help the professionals to understand the true value of your equipment, inventory and cash position. If you don’t cooperate, the appraiser, for example, will assume the worst and the result can be a lower valuation, which in turn will only make the lender more nervous about its position. Also, make sure your information is up-to-date. Accurate information will help the appraiser properly value your physical assets, and provide the best valuation. Since you will be paying for the appraisal, request from your lender to see all the reports and assumptions behind the numbers. Answering to these professionals and their requests for information is a great idea, since cooperation will increase the lender’s trust in your ability to run and own your business.
- Think about hiring advisers – Bankruptcy is what you’re up against. Hire experienced bankruptcy counsel. If it becomes necessary to file for bankruptcy protection, or if the bank or other creditors force the company into involuntary bankruptcy, you will want to be prepared, understand your options, and know your responsibilities.
A bankruptcy specialist will often also be experienced with out-of-court restructuring and other options that are often less costly and more effective. The presence of bankruptcy counsel can be very helpful in your negotiations with the bank to obtain a waiver, forbearance or recast of the loan agreement. Most lenders prefer that the company is prepared and properly represented, and they will respect your decision to engage knowledgeable advisers.
Develop a Plan
The first step is determining if the core business is viable. If it is, it’s important to project what the company’s position will be in the next three months, six months, and in a year. If the business is salvageable, either by itself or through a sale or other restructuring, figure out what it will take to stop the business from bleeding out, and then how to get to your goal. The bank will want to see a plan of action that is thought-out, realistic, and in a written narrative form. Your plan should be fully supported by financial statements and projections that show that the company has a clear path for the future and will be able to meet the bank’s obligations.
How Alternative Funding Partners can Help
It’s important to note that not all outcomes of getting your loan sent to special assets are negative. Many businesses that have been in this position have been able to meet the bank’s goals and are able to keep their current financing option or they qualify for refinancing. However, there is still a strong chance that the business will ultimately be unable to meet the bank’s requirements and therefore will have to repay the financing quickly back to the bank. This is where Alternative Funding Partners can help. We can refinance your loan so that your business can keep on going. You get to keep your collateral and safely get out of your relationship with the bank with your money, business, and peace of mind intact.