If You Can’t Make Payment, a Credible Plan Is a Must

Picture this: You get a bank loan for your company, and you put the capital to work in, say, a marketing campaign to generate sales of a new product.

The campaign starts well, and orders come in. Your eyes light up at the thought that this undertaking, financed by your new bank loan, will get your business to a new level.

Then a key supplier unexpectedly tells you that it can’t make good on a contract for raw material crucial to your new product. In an instant, you realize that without this raw material you can’t meet the demand from your new customers, and without the new revenue, you can’t make the payments on your new bank loan.

What to do?

For starters, don’t panic. You face a test of your ability to manage hard times, but it need not mean disaster. In fact, you can overcome the dangers you face if you keep your wits about you and understand how lenders handle the problem loan--and how you can persuade your own lender to get yours back on track.

Your first tactic, of course, is to speed the collection of your accounts receivable and delay payment on accounts payable. If you can speed production of items that sell quickly, do that too.

You will feel the temptation to keep your loan officer in the dark. Resist it; you need someone on your side who has a stake in getting you out of trouble, and at this point, that means your loan officer. In any case, you accomplish no good if you try to hide your trouble.

But you probably don’t want to go to your lender until you know how you can overcome your difficulty. Hence, you should quickly devise a reasonable solution to your problem, and bring your lender into the picture as soon as you have the plan in hand.

To prepare, spend some time analyzing three items about which you must be very clear--the problem, its causes and the solution.

If your problem is a supplier that goes belly up, can you find another? How long will it take to get the new supplier on line, and at what cost? How much time do you need to generate new revenue from the sale of goods stemming from this arrangement? What cost-saving measures can you take in the meantime?

If your problem is a price-cutting competitor, can you reposition your own product with a new marketing push? Could you target a new market? How long would it take to do this, and what would it cost?

Commit your analysis to writing in the form of a brief business plan. Make it clear and forthright--because it represents your best hope to keep your lender on your side.

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Then go look your loan officer in the eye.

“The old saying is that lenders don’t like bad news,” says Arthur A. Greenberg, whose Encino law firm Greenberg & Bass specializes in commercial finance and insolvency matters.

“But they’ve got to have the news, good and bad. The question isn’t whether to tell your lender what’s going on,” he says. “The question is when, and that’s a very delicate matter.”

Greenberg counsels his clients not to delay in informing their lenders of the problem--and to have a cogent plan in hand when they do. If lenders don’t like bad news, he says, they also don’t like feeling trapped. And if they sense that you see no way out of trouble, they feel trapped indeed.

Give your loan officer a copy of your plan, and work hard to keep him or her on your side.

“You have to go in with a credible plan,” Greenberg says. “Maybe you cut staff or give up some space to your landlord. Whatever your strategy, if you maintain your integrity with your lender, you’ve got a much better chance of working things out.”

On a practical level, the lender with liens against such assets as inventory or accounts receivable can shield you from your unsecured lenders, giving you time to resolve your difficulty, Greenberg says. Unsecured creditors stand second in line to collect and usually back off if the value of the secured property isn’t enough to satisfy all parties.

“If you do it right,” Greenberg says, “you can make your lender your 800-pound gorilla. If the lender’s on your side, you might keep the others away long enough to solve your problem.”

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In the worst-case scenario, your problem ends up in the hands of your lender’s “workout” people. Unlike your loan officer, workout specialists have no stake in the loan. Their goal is to put a stop to the loss, and they do whatever it takes to meet that goal, including seize your collateral, Greenberg says.

At this point, your best hope may be to seek expert legal help, according to Barry Cappello, a partner in Santa Barbara law firm Cappello & McCann, which specializes in lender-liability and borrower-rights law.

Be careful about signing what lenders call a pre-workout negotiation agreement setting out the ground rules of the workout, Cappello says.

“Watch out if the agreement waives your right to a jury trial or releases the bank from any liability claims,” he adds, “or if it says that you agree that you owe the money and have no defense against the lender’s claim.”

These days, lenders often require borrowers to waive their right to a jury trial as a condition of granting the loan, Cappello says. So by the time you get the pre-workout agreement, it may be too late. Similarly, in their eagerness to enlist the lender in overcoming their problem, borrowers may sign away the right to defend themselves against the lender’s claim in the pre-workout agreement.

Clearly, Cappello says, these are bargaining tools, and you shouldn’t give them away without careful consideration.

“You don’t always find grounds to fight back against a tough workout department. You’ve got to justify what you’re asking for. Don’t go in asking what they’re willing to give you. Go in with a list of things you need and negotiate as hard as you can,” Cappello says.

“If you prepare carefully, you might be able to skip some payments on the debt or get a reduction in your interest rate, or maybe even a reduction in the debt itself,” he adds.

All in all, Cappello says, the problem loan tests everybody involved. If it raises serious threats to your business, it also gives you an opportunity to show that you can manage in a crisis--good schooling for anyone who wants to succeed.

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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.