Business Triage: Know Your Loan Options
By Trip Holmes
During a downturn, it’s important to know your options, be proactive, and protect your business. There are several areas that we address with Sabre Capital’s Business Triage services, and one of the best areas where you can start a new path forward to survival and later success is by working on your corporate debt.
Companies use business loans and lines of credit for a variety of purposes, including the purchase of real estate and equipment, bringing on new employees to meet the expansion demands of new customer acquisition, or bridging cash flow gaps between manufacture and delivery of products. These same loans that helped your business grow in different ways can become overly burdensome when your business is unexpectedly hit with a recession such as what we’re facing with COVID-19 pandemic. Thus, it’s important to align your corporate debt terms, if possible, to the new realities of the economy and your business’s ability to compete and land business.
Let’s talk about your options.
Loan Modification
Also called “loan restructuring,” modification is a change in the terms of your promissory note, with goals of getting the bank paid along with the survival of your business. With loan modification, the bank ultimately changes its repayment terms, whether that means a reduced interest rate, re-amortizing the number of months or years remaining in your note to a longer period of time, or both.
Whether it’s an interest rate reduction or a change in the time frame for repayment, your monthly obligation is lowered to give your company more cash flow breathing room.
Loan modifications in consumer lending are relatively simple, but that’s usually not the case on the commercial side. Instead of a single conversation followed by a quick offer from the bank, loan modifications for business loans can be complex and require some negotiation. That’s why you need advisors like your corporate attorney and a seasoned commercial loan negotiator from our Sabre Expert Network.
Loan Workout
People sometimes use the terms “loan modification” and “loan workout” interchangeably, but there are differences. As we explained above, a loan modification involves rewriting the terms of a loan. But sometimes, middle-market business owners need a more sophisticated solution to address the crisis at hand. In these cases, they negotiate a workout.
Workouts often, but not always, include a modification of the original terms. These situations often dictate that banks go deeper into their own pockets to help you, such as waiving of certain fees and a period of forbearance.
The concept of forbearance can take on many forms. At its core, forbearance means skipping payments, whether it’s for a quarter or even longer. Here’s where it gets complicated: just because you skip payments, it doesn’t mean they go away. Lender and borrower must agree what to do about these payments at the end of the forbearance period, whether it’s a balloon payment of the missed installments and accrued interest, having those missed payments included in a modification that changes the term and/or interest rate of the note, or some combination of these factors.
Will You Qualify?
You need to address a variety of factors to ensure your best chance at a modification or workout of your corporate debt. The bank will want to know that you’ll be very likely to repay them if they move forward with any changes to your current agreements, and you will have to demonstrate that strength in your proposal.
· These factors can include, but are not limited to, the following:
· Your payment history with the bank
· Your overall credit history
· Changes to your business plan to align to current market conditions
· Your equity position with regard to collateral (where applicable)
Why Negotiate?
You always want the best terms you can obtain in a loan request, but especially so when you’re in dire circumstances. In addition, when you work with a professional advisory team on your side, those advisors will have a better idea of the potential resolutions you can achieve, based on their experience working with others. Relatively speaking, going it alone leaves you in the dark, limited to your own experience (which may be none) and that of your friends and contacts.
It’s so important that you understand what your options are and how they will impact your current situation and your company’s ability to move forward healthier. Before you approach your lender to discuss a loan modification or even more complex workout agreement, get reacquainted with your existing loan documents and get the right professionals on your side.
Between your corporate attorney and our lending specialists, the right solutions will emerge, and together, we will put you in a stronger negotiating position with your lender. Our combined services will include analysis of your company’s financial condition and ability to repay based on new scenarios, proposal and negotiation, and then final review, so that you understand your new rights and obligations.
Contact our team today to get started!