Small business borrowers with troubled loans are in a unique position today. In the 1980s and early 1990s, lenders were quick to foreclose on non-performing loans. Now, after years of multi-million-dollar verdicts against them for "lender liability," lenders 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 an appealing option. The key is to negotiate the most favorable new terms without compromising your legal rights.
The first step of a successful workout is to convince your lender you can
ultimately pay off the renegotiated loan. You must show the lender why it would be in the
lender's best interest to agree to a workout arrangement. If convinced, a lender may be willing to
reduce the loan interest rate, reduce monthly payment amounts or change other loan terms.
Many borrowers make the mistake of waiting until their lender starts sending threatening payment demand letters before approaching the lender with a workout plan. By that time, chances of renegotiating the loan are slim. Putting off contact with the lender 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, you show you are aware of your business's financial troubles and have devised a program that will improve the financial picture and keep the loan performing. Lenders are more likely to go along with a workout plan if non-financial factors are strong within your company. They look at the borrower's management team's honesty, integrity, long-term business planning ability, track record and competency. All play a key role in a lender's decision-making process.
A successful workout begins with thorough pre-negotiation preparation. You need to identify problems within your business that may have caused the financial problems and develop solutions to those problems prior to approaching the lender. If the issues are complex or the negotiations are anticipated to be difficult, competent legal counsel is required at this stage.
Present to the lender reliable, professionally-produced analyses and projections that will convince it 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 enabling the business to meet its financial obligations. New management methods or marketing efforts designed 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 who know what lenders are looking for in workout plans, 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. In other words, be ready to move quickly once the lender agrees to a meeting.
The Presence of Lender Liability
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:
1) tries to control aspects of the business;
2) adds new conditions to the loan after the business has accepted the original terms;
3) improperly uses acceleration and demand clauses in the loan documentation as a means
to ensure compliance or punish the business;
4) 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;
5) 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 lender liability 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 see that the
necessary corrections are made 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. If you are unsure of this area of law, seek the help of outside counsel experienced in lender liability claims.
Be prepared to respond to whatever loan revisions the lender may suggest. Lenders know borrowers are usually in a vulnerable position during workouts. Because of this, the lender 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 against the lender. If the lender asks for a release or a waiver of important rights,
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, or forego
negotiations and begin legal action against the bank). 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 about the future. Anticipate difficult times 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). Each loan workout is different. 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. Some lenders require borrowers to pay any lender's attorney's fees incurred in the workout.
The written documents of a workout can be just as comprehensive as the original loan documents. 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.
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. But, if a lawsuit is your last option, brace yourself for the long and difficult road ahead. If the case is strong, many lender liability attorneys will take the case on a contingency fee basis. This still often requires the borrower to pay legal costs such as expert witness fees. These costs can be high so save for a legal "war chest."
Workouts, unlike legal action, can make winners out of both lender and borrower. Keep in
mind, however, that initiating workouts should not be used as a stall tactic to buy time for the financial troubles of your business. 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.