YOUR COMPANY IS LOOKING FOR RESTRUCTURING & WORKOUT SOLUTIONS!
NEED A FINANCING WORKOUT STRATEGY AROUND UNDERSTANDING BANK WORKOUTS?
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
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"In the middle of difficulty lies opportunity." - Albert Einstein
Struggling with business debt? Discover how a bank workout can be your path to financial redemption.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Bank Workout and working capital solutions – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Bank Workout: 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, often due to troubled bank loans. Neil Sedaka had it right when he penned ‘ Breaking up Is Hard to Do!’
What exactly is a bank workout?
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Negotiation process between a business and its lenders in a special assets group
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Aims to restructure debt obligations
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Typically involves modifying loan terms
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This can include interest rate adjustments, payment deferrals, or debt forgiveness.
How can business owners successfully emerge from a bank workout group special loan/demand loan scenario with solid business financing and debt restructuring when placed in the ‘ special assets ‘ category? What options are available to do this? Let’s dig in.
DID YOU KNOW?
- Approximately 75% of businesses that undergo a successful bank workout avoid bankruptcy within the following five years.
- On average, bank workouts result in a 30-40% reduction in overall debt obligations for participating businesses.
- Nearly 60% of bank workouts involve some form of interest rate reduction or temporary payment deferral.
- Businesses that engage in bank workouts typically see a 25% improvement in cash flow within the first year post-restructuring.
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 it 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 for your business loan 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. Reducing 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 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.
Of course, the goal is to negotiate with your firm about how your agreement within their loan portfolio will be managed under certain deadlines, which should never be ignored.
Borrowers' ability 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. Of course, this exposes the bank or 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, 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!
An appropriate business plan and cash flow projection based on anticipated sales revenues are key at this point.
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 essential 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, benefiting both the bank and the borrower.
Of course, the bank is 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 essential to mention that your old account manager and branch will often be disappearing at this point as specialized ‘workout’ managers from the bank's workout group are now handling your banking.
Understanding 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 commercial lenders 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.
Click here for more information on 7 Park Avenue Financial and financial turnaround financing. Your firm's ability 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 might sometimes 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
When it comes to understanding bank workouts, it has never been more important to assess the cash flow, assets, and collateral your business has.
We’ll also mention that bank workout managers will typically ask you to report more on key asset categories such as receivables, inventory, payables, etc., which are key aspects of a line of credit.
If your business is of a certain size, the bank will require expensive audits and appraisals 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 general economic conditions for a turnaround, pandemics notwithstanding, are excellent for the borrower, depending on your industry prospects.
Determining what charge-offs might be in your accounts receivable or inventory is a key focus of new and required due diligence, ensuring that payments are efficiently managed through your bank account.
IS THERE A REAL ESTATE COMPONENT
In some cases, real estate might be a part of the problem loan scenario and is often handled separately via a sale-leaseback, mortgage refinancing, equity takeout, or a short-term bridge loan.
Numerous possibilities arise around real estate with payments structured to the solution at hand for badly needed cash to avoid any foreclosure litigation.
There may be special assets in the business - that might be goodwill, patents, contrast, etc.- and they should be viewed in the context of their 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 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 been deemed ' high risk. ‘
ASSET-BASED LENDING TO THE RESCUE?
Various options are in place for your firm to receive new financing.
They typically include new 'NON-BANK ASSET BASED LINES OF CREDIT ' from commercial lenders focusing on your assets and business prospects. In some instances, 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.
UNDERSTANDING BANK WORKOUTS
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.
3 uncommon takes on bank workouts:
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Bank workouts can be a catalyst for innovation. The restructuring process can spur businesses to reimagine their operations and develop creative solutions.
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Psychological benefits for business owners: Successfully navigating a bank workout can boost confidence and resilience, leading to improved decision-making.
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Bank workouts as relationship builders: The collaborative nature of workouts can strengthen the bond between businesses and their lenders, fostering long-term partnerships.
KEY TAKEAWAYS
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Debt analysis: Thoroughly examine existing obligations to identify areas for restructuring.
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Cash flow projections: Develop realistic forecasts to demonstrate future repayment capacity.
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Negotiation strategies: Master effective communication techniques with creditors.
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Asset valuation: Accurately assess business assets to leverage in workout discussions.
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Repayment plan design: Craft feasible proposals that balance creditor and business needs.
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, call 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, which could be just the solutions you seek.
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 suit both parties better. In some cases, this might be some loan forgiveness and a restructuring of existing loan covenants.
Potentially, waivers of certain defaults or renegotiation of interest rates on financing may allow a company to restructure during 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. Troubled loans are classified as 'non-performing' in a bank and 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 cannot 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 regarding the borrower's obligations. Loan terms can be changed to prevent further default based on strategies such as extending maturities, partial write-off of the debt, and, in some cases, a reduced interest rate.
How can a bank workout improve my business's cash flow?
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Reduces immediate debt burden
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Allows for more manageable payment terms
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Frees up capital for essential operations
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Provides breathing room to implement revenue-generating strategies
What long-term advantages does a bank workout offer?
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Preserves business credit rating
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Maintains relationships with key lenders
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Provides an opportunity to restructure operations
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Allows for strategic planning and growth initiatives
Can a bank workout help me avoid bankruptcy?
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Offers alternative to formal insolvency proceedings
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Provides a structured approach to debt management
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Allows for business continuity during financial restructuring
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Reduces risk of forced asset liquidation
How does a bank workout impact my business's reputation?
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Demonstrates a proactive approach to financial challenges
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Shows commitment to meeting obligations
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Can improve stakeholder confidence
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Positions business for future financial partnerships
What financial skills can I gain from a bank workout process?
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Enhanced cash flow management techniques
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Improved negotiation abilities
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Better understanding of financial statements
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Stronger strategic planning capabilities
Who initiates a bank workout?
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Can be initiated by the business owner
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The lender may suggest it
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Often occurs when financial difficulties become apparent
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Sometimes recommended by financial advisors or accountants
Is a bank workout the same as debt consolidation?
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Bank workouts focus on restructuring existing debt with current lenders
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Debt consolidation involves combining multiple debts into a single loan
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Bank workouts may be more comprehensive in addressing business financial issues
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Both aim to improve overall financial health
Are there costs associated with a bank workout?
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May involve fees for financial advisors or legal counsel
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Some lenders charge restructuring fees
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Potential costs for business valuations or financial audits
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Long-term savings often outweigh upfront expenses
How long does a typical bank workout take?
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Timeframes vary based on the complexity of the financial situation / banking situation
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It can range from a few weeks to several months
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Depends on the number of creditors involved and complexity of loan documents
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It may require multiple rounds of negotiations for many business owners in this situation
What criteria do banks consider when agreeing to a workout?
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Business viability and future profitability potential to make loan payments
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Quality of management and business plan
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Current asset values and collateral
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Historical relationship with the business
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Likelihood of successful turnaround
How does a bank workout differ from formal insolvency proceedings?
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Less formal and typically more flexible
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Allows for continued business operations without court intervention
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Often results in better outcomes for both business and creditors
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Preserves business value and avoids the stigma of bankruptcy
What role do financial advisors play in a bank workout?
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Assist in preparing financial projections and restructuring plans
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Act as intermediaries between business and creditors
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Provide expertise in negotiation strategies
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Help identify operational improvements to support turnaround efforts
