YOUR COMPANY IS LOOKING FOR RESTRUCTURING & WORKOUT SOLUTIONS!
NEED A FINANCING WORKOUT STRATEGY AROUND UNDERSTANDING BANK WORKOUTS?
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Financing & Cash flow are the biggest issues facing businesses today
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COMMERCIAL LOAN WORKOUTS FOR PROBLEM LOANS
Special loans bank workout status is, of course, the term for your company’s relationship breakup with your bank or another commercial lender, and Neil Sedaka had it right when he penned ' Breaking up Is Hard to Do!
How can business owners successfully emerge from a bank workout group special loan/demand loan scenario with solid business financing and debt restructuring when they are placed in the ' special assets ' category? What options are available to do this? Let's dig in.
UNDERSTANDING HOW THE BUSINESS GOT HERE / THE CREDIT PROCESS
We've always been a little bit amazed at the surprise of some clients who advise us they didn’t see it coming relative to having their bank facilities called and finding themselves in the workout department and ' offside ' on issues such as loan covenants and ratios in loan restructuring when a borrower defaults.
Suffice to say that the implications of this 'relationship termination ' can be significant for your business if not attended to properly - not wanting to be a part of a bank or commercial lender's loan losses is job 1! when a loan payment has been missed based on previously agreed-upon monthly payments.
WHAT IS THE BANK / LENDER POSITION
What is the role of the workout banker? From the banker's perspective, it's a simple case of your company being deemed over and above the risk level they will take in their loan portfolio; they are prepared to take in an ongoing bank relationship that might have both revolving and term facilities in place for your financing needs. Typically, your firm has not met the bank's loan covenants, and ratios at the outset of the relationship and loan agreements are not in agreement!
The workout bank is now focusing on reducing risk exposure. The reduction of the lender's additional expenses is also an important focus - It's important to understand the motivations of banks and lenders in special loan scenarios.
Understanding the role of the workout banker is key to demystifying the entire distressed workout process and generating support from potential new lenders. Workout success for both the lender and the borrower will create a win-win scenario - bank risk is eliminated and a firm survives.
The workout group at your bank or other commercial lender is chartered to manage your loan/loans as special assets they have deemed potentially uncollectible. The goal is, of course, to negotiate with your firm about how your agreement within their loan portfolio will be managed under certain deadlines, which of course, should never be ignored.
The ability of borrowers to develop turnaround strategies and timelines for a proposal that is acceptable to the bank or other commercial lender allows your company to avoid the worst outcome- business failure. In some cases your company may have unfunded credit facilities that you have negotiated and not drawn down on - that of course exposes the bank / commercial lender to further losses - so a workout banker will typically seek to eliminate any unfunded credit your business might have access to.
It is important to understand that the workout process can still in some cases allow you to access revolving credit. Here is where your firm must demonstrate that any additional credit that is extended will in fact improve the bank's position as opposed to worsening it with additional risks!
At this point an appropriate business plan and cash flow projection based on anticipated sales revenues are key. At this point, the focus is not on marketing or branding! It's all about a path to liquidity and demonstrated self-help management around expense reduction.
MANAGING DEADLINES AND FORBEARANCE AGREEMENTS
The critical part of your Special loans journey involves any deadline set by the bank workout department. Here it's important to determine whether the bank's exit strategy is ' immediate' or if they will work with you on options that can ultimately save the relationship. The bank is, of course, interested in full recovery of any loans or credit facilities, so the critical question becomes: Can this relationship be saved or are other financing options available?!
THE ROLE OF THE WORKOUT BANKER / WORKOUT DEPARTMENT
We've used the word relationship several times - it's important to mention that your old account mgr and branch will often be disappearing at this point as specialized ' workout ' managers are now handling your banking. Your ability to understand the bank's position on the risk associated with your business is key. In some cases, there is value in accepting turnaround strategies as suggested by the bank, which they, in turn, would support. Click here for more info on a turnaround strategy from 7 Park Avenue Financial.
In some cases, banks or the commercial lender will offer some ongoing support but let's be clear; they are not obligated to continue lending. A solid turnaround plan and restructuring must be demonstrated.
For more information on 7 Park Avenue Financial and financial turnaround financing, click here. The ability of your firm to demonstrate full recovery or payout is key. At this point, it's all about liquidity and your firm's challenge to maintain or increase sales, reduce fixed costs, and accelerate asset turnover, which in some cases might be selling assets in the bank loan workout process.
WHAT IS YOUR OPTIONS FOR A NEW SENIOR LENDER / LENDERS?
We've worked with many firms in Special Loans and spent numerous amounts of time seeking other Canadian chartered bank facilities to replace the stress of their Special Loans scenario when a new lender We have rarely seen this strategy be successful, if ever, if only because we think that competitive banking is not achieved by buying someone else’s problems as part of bank workout strategies!
IT'S ALL ABOUT UNDERSTANDING ASSETS
At this point, when it comes to understanding bank workouts, never has it been more important to assess the cash flow, assets, and collateral your business has. We'll also mention that the bank workout managers will typically ask you to be reporting more on key asset categories such as receivables, inventory, payables, etc., those key aspects of a line of credit.
In certain cases, if your business is of a certain size, expensive audits and appraisals will be required by the bank at your cost. This is a great time to determine what you feel your future financing course will be if only to avoid these high fees.
Interest rates are low and in general economic conditions for a turnaround, pandemics notwithstanding, are excellent for the borrower, depending on what your industry prospects are.
The ability to determine what charge-offs might be in your accounts receivable or inventory is a key focus of new and required due diligence.
IS THERE A REAL ESTATE COMPONENT
In some cases, real estate might be a part of the problem loans scenario and is often handled separately via a sale-leaseback, mortgage refinancing, equity takeout, or a short-term bridge loan. Numerous possibilities arise around the real estate with payments structured to the solution at hand for badly needed cash money to avoid any type of foreclosure litigation.
There may be special assets in the business - that might be goodwill, patents, contrast, etc. and should be viewed in the context of the value to the ongoing business.
LET 7 PARK AVENUE FINANCIAL HELP YOU UNDERSTAND REFINANCING OPTIONS
At the heart of the loan workout at the bank is your determination as to whether you, in fact, need to move on to another commercial loan, or other methods of financing your business. In some cases, if it hasn’t been made clear, your bank might be viewing your entire industry as ' out of favour. ‘ Over the years, industries such as auto, printing, etc., have found themselves deemed ' high risk. ‘
ASSET-BASED LENDING TO THE RESCUE?
Various options are in place for new financing for your firm. They typically include new 'NON-BANK ASSET BASED LINES OF CREDIT ' from commercial lenders who are focusing on your assets and business prospects. In certain cases, temporary asset bridge loans might make sense, providing an interim step to a new financial strategy at market rates commensurate with your firm's situation.
THE COST OF REFINANCING/RESTRUCTURING
Given the emergence of ' problem loan' status, most owners and financial managers should be aware that any new interest rate on financing will reflect the business's current status and the balance sheet's overall look. In the short term, it becomes accessible to capital versus the cost of capital.
CONCLUSION - FINANCING THE LOAN WORKOUT
If you're looking for loan workout options and that ' getting out of jail free' feeling via your current situation in a bank workout special loans scenario, seek out and speak to the 7 Park Avenue Financial team of professionals, a trusted, credible and experienced Canadian business financing advisor who can provide options in the troubled situation of your bank breakup.
Let our team help you through the loan workout process via a workout finance strategy tailored to your needs could be just the solutions you are looking for.
FAQ: FREQUENTLY ASKED QUESTIONS
WHAT IS A WORKOUT AGREEMENT?
Workout agreements are arrangements between lenders and borrowers where the terms of an agreement may be renegotiated to better suit both parties. In some cases, this might be some loan forgiveness as well as a restructuring of existing loan covenants.
Potentially waivers of certain defaults or renegotiation of interest rates on financing may allow a company to restructure in times of an economic downturn.
WHAT DOES A BANK WORKOUT GROUP DO?
A bank workout group is a part of a commercial business bank or lending institution that manages special assets and problem loans. The bank's focus in workouts is to negotiate and manage forbearance agreements. Troubles loans are classified as 'non-performing in a bank and are placed in a ' special asset ' category based on defaulted loan covenants.
WHAT IS A FORBEARANCE AGREEMENT?
The forbearance agreement sets out specific goals and demands by the bank that has a timeline attached - if a defaulted loan is not able to meet the goals set out the loan will be foreclosed on. Specific timelines are associated with a forbearance agreement that allows a bank or other commercial lender to impose action remedies on the default.
What is a loan workout?
Loan workouts are agreements between borrowers and lenders around the obligations of the borrower - Loan terms can be changed to prevent further default based on strategies such as extending maturities or a partial write-off of the debt and in some cases a reduced interest rate.
Click here for the business finance track record of 7 Park Avenue Financial