The 10 important things borrowers must understand about Workout
For many customers, the mere hearing of the statement “we will transfer your loan to workout” can be both terrifying and traumatic. While workout bankers can be some of the best people you have ever met and worked with, the seriousness of the environments they operate in, and the desperate nature of some of their customers’ businesses can cause customers to approach workout officers with apprehension. The immediacy of problems faced by some borrowers in workout usually requires urgent solutions and remedies in order to save the customer and minimize risk for lenders. Unfortunately, many borrowers are not familiar with the workout process. As a result, they go into it with fear and ambivalence. For most borrowers, going into workout without an understanding of some of the fundamental rules and can be traumatic. In order to help ease the initial concerns faced by borrowers whose loans were transferred to workout, we have developed “The 10 Important Things Borrowers Must Understand about Workout”.
1. If you are one of those borrowers who has never read his loan agreement again since it was signed, you will be forced to read it once you are in workout – yes, you have a copy and you signed it too. Sorry, the bank did not forge your signature.
2. Being in default of your loan agreement with a lender can be detrimental to your business and financial health. Whenever feasible, avoid being in default of your loan agreement. Doing so gives a lender the right to change the terms of your loan agreement, usually in the lender’s favor.
3. It is important to proactively monitor the covenants in your loan agreement. If you are going to be in default, seek a waiver or modification about 2 to 3 months before the covenant measurement date (not reporting date). This will give you ample time to do something different to avoid being in default in the event your lender declines to modify or waive the potential covenant violation.
4. Do not misconstrue timely regular monthly payment of your loans as an assurance that the lender is satisfied with the credit risk of the loan. Lenders evaluate your future ability to pay, not your historic payments. Your good record of historic timely payment is helpful but the lender is not concerned about the money it has already received. The concern is about the payment they may not receive in the future. Remember, you account has already been credited for the previous payment. There is no double credit. As the saying goes, the past (payments) is only an indicator of the future, not a guaranty of it (payments), and in this case, your past payments do not guaranty that you will be able to make your future payments. A bank will still call a default even if all your payments are current. What the bank does with the default will depend on your financial condition at the time.
5. There is no such thing as a “technical default”. A lender who wants to be repaid will use any default, including failure to provide required financial statements, to declare a default and eventually accelerate its loan. This is regardless of the current status of your loan.
6. Refusing to communicate with your lender, including failing to provide required financial information is a sure way to be asked to find another bank. Lenders do not like to be in the dark. Remember the old saying that “where a man’s money is, there his heart is also”. Lenders are no different.
7. Cash from sale of fixed assets, especially cash from sale of assets pledged as collateral, goes one way when your loan is in workout – to the lender. If you need some of the proceeds of the asset sale for your working capital, it is best to reach an understanding with your lender about the use of proceeds before you sell such collateral. Although most workout departments attempt to resuscitate their loans, it is important to remember that while workout officers can identify and help retain viable businesses in the lender’s portfolio, their primary responsibility is to resolve problem or deteriorating loans in order to reduce risk for the lender. If your loan is in workout and in default, pledging additional collateral can usually buy you a minimum of 90 days of forbearance. To understand the basis of this assumption, speak to a Consultant at BSD Advisors.
8. In workout, cash is truly king. Banks toss out the traditional cash flow and rely on cash receipts and disbursements. For example, an increase in payable, while a source of cash by accounting standards, can not help you meet your weekly payroll because it is not a free cash flow. You are going to need real cash which lenders refer to as “free cash flow”. In this instance, if it was not deposited in your bank account, it was not cash. This is why lenders ask for “13-Week Cash Flow Forecast” which is simply a schedule of cash receipts and disbursements.
9. Retaining a Turnaround Consultant IS NOT an indication of weak management. Everyone needs a knowledgeable advisor. Not having one can be more expensive and terminal to the financial well-being of your business. Turnaround Consultants are specially equipped and trained to handle issues arising from loan defaults.
10. Lawyers, Accountants, and Turnaround Consultants play different roles in workout. In the end, you have to make a decision; hopefully after consulting with each of these professionals in their respective fields. Remember, the individual or stakeholder who stands to lose the most in the event of a winding down of the business should have the right to make the final decision – this is usually the owner unless there is no equity in the business. Borrowers must remember that professionals are only advisors who should not be used to avoid a business decision that must be made by business people. Doing so will unnecessarily increase the cost of workout and possible early bankruptcy or liquidation. You may need a lawyer but banks are not scared of them. If you can hire one lawyer, your lender can hire two. You should make the business decision and refrain from passing it to your lawyer or Accountant unless you are incapable of making business decisions.
At BSD Advisors, we know workout. For more information and detailed explanation of any of the numbered sections above, please contact BSD Advisors at www.bsdadvisors.com or call us at 1-866-982-2822