"In the middle of difficulty lies opportunity." - Albert Einstein
Bank Workout: Commercial Loan Workouts for Problem Loans
Introduction
Your lender's letter arrives, and the language has changed. Your account manager is gone and someone from “special loans” wants a meeting.
Commercial loan workouts can be the difference between a temporary cash-flow crisis and losing control of a business you built. When payments slip, covenants are breached, or a loan matures without refinancing, lenders may consider a restructuring—but they need evidence that the business can recover.
7 Park Avenue Financial has helped Canadian business owners navigate commercial financing, cash-flow solutions, and structured debt
The moment you sign a forbearance agreement, you formally acknowledge the default and your guarantee. You now have a fixed number of weeks to fix the business or refinance it.
What exactly is a bank workout?
Commercial loan workouts are negotiated solutions between a business borrower and lender when a loan is under stress. They can include a payment extension, deferral, renewal, modification, forbearance, refinancing, asset sale, or an orderly exit
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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.
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!’
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? 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.
FOCUSING ON THE BRIDGE BACK TO NORMAL FINANCING
“The workout is the bridge, not the destination” means a commercial loan workout should give a business time to reach a sustainable financing position. Payment relief, revised covenants, or a forbearance agreement can create breathing room, but the business still needs to address the problems that caused the default.
The destination should be clear: restored cash flow, manageable debt, and a financing arrangement the company can maintain. That might mean returning to normal bank terms, refinancing with an asset-based lender, selling surplus assets, or repaying debt through improved operations.
For example: A lender grants six months of payment relief. During that period, the company improves collections, reduces costs, and arranges replacement financing. The relief is the bridge; the ability to operate and meet its obligations after that relief ends is the destination.
The key question is: “What will change during the workout that allows the business to succeed when temporary concessions expire?”
3 UNCOMMON TAKES ON SPECIAL LOAN WORKOUTS
- Forbearance involves trade-offs. Temporary relief may require admitting defaults and waiving legal defences.
- Your lender may expect an exit. Use the workout period to prepare refinancing, rather than assume the banking relationship will continue.
- Act before default. Early discussions backed by a cash-flow forecast and repayment plan can strengthen your negotiating position.
WHAT IS THE BANK / LENDER POSITION
What is the workout banker's role? 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. Understanding the motivations of banks and lenders in special loan scenarios matters.
Understanding the workout banker's role is key to demystifying the distressed workout process and gaining support from potential new lenders. Workout success for the lender and the borrower creates 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 negotiated but have not drawn down. 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.
The workout process can still, in some cases, allow you to access revolving credit.
Here, your firm must demonstrate that any additional credit extended will improve the bank’s position rather than worsen it with additional risk.
An appropriate business plan and cash flow projection based on anticipated sales revenues are key here.
Right now, 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 wants 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, it makes sense to accept turnaround strategies the bank suggests and 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. You must demonstrate a solid turnaround plan and restructuring.
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 significant 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's never been more important to assess your business's cash flow, assets, and collateral.
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 may be in your accounts receivable or inventory is a key focus of new and required due diligence, ensuring payments are managed efficiently through your bank account.
MATCHING A PROPER FINANCING SOLUTION
A commercial loan workout can reveal that the financing no longer matches how the business generates cash. Extending the existing loan may provide temporary relief while leaving that mismatch unresolved.
Better-fitting financing could include:
- Asset-based lending: Links borrowing capacity to eligible receivables and inventory.
- Receivables financing: Releases cash tied up in unpaid customer invoices.
- Equipment refinancing: Unlocks equity in machinery, subject to existing debt and lender approval.
- A term loan: Spreads repayment of a longer-term funding need over a defined period.
For example: A company constantly using its operating line to fund a permanent working-capital requirement could refinance that portion with a term loan, preserving its line for seasonal needs.
The goal is to match financing and repayments to the business’s cash flow. Refinancing succeeds only if the company can afford the new obligations and address the underlying operating problems.
IS THERE A REAL ESTATE COMPONENT ?
In some cases, real estate may be part of the problem loan scenario and is often handled separately through a sale-leaseback, mortgage refinancing, equity takeout, or a short-term bridge loan.
Real estate offers several options, with payments structured to the situation to secure needed cash and avoid foreclosure litigation.
There may be special assets in the business - that might be goodwill, patents, contracts, 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 decision about whether you need to move to another commercial loan or other ways to finance 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 catalyze 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.
Case Study #1
From the 7 Park Avenue Financial Client Files
Company
ABC Company, a family-owned metal fabrication manufacturer in southern Ontario with about 40 employees and a $3.2 million operating line and term loan with a chartered bank.
Challenge
Two delayed customer payments and higher steel costs pushed ABC Company into breach of its debt service coverage covenant. The bank moved the account to special loans, issued a demand, and offered a 90-day forbearance agreement. It required reaffirmed personal guarantees, weekly reporting, and a forbearance fee. The bank made it clear it expected to be repaid by the end of the period.
How We Got There
- Built a 13-week cash flow forecast so the owners could negotiate from facts.
- Had the owners’ lawyer review the forbearance terms before signing.
- Valued the receivables, inventory, and equipment to size a replacement facility.
- Approached asset-based lenders in our network and placed an ABL facility secured by receivables and inventory.
- Covered the remaining gap with an equipment sale-leaseback on two press brakes.
Results
- The bank was repaid in full before the forbearance period ended.
- No receivership and no call on the owners’ personal guarantees.
- Borrowing availability now grows with sales instead of being fixed to old covenants.
- All 40 jobs were kept.
Case Study #2
Company: ABC Company, a mid-sized Ontario transportation and logistics firm.
Challenge: Rising fuel and labour costs reduced cash flow. The company missed two loan payments, breached a debt-service covenant, and faced a maturing term loan it could not refinance on existing terms.
Solution: How we got there: 7 Park Avenue Financial reviewed the company’s receivables, equipment values, debt schedule, and 13-week cash-flow forecast. We helped management prepare a realistic turnaround plan, approached alternative lenders, and structured a refinancing package using receivables financing and equipment-based financing to reduce pressure on the operating line.
Results: ABC Company secured additional working capital, stabilized supplier payments, met revised lender reporting requirements, retained its workforce, and returned to positive monthly cash flow.
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
Commercial loan workouts provide a structured, collaborative path to renegotiate terms with your bank before formal default occurs, protecting your operations and hard-earned capital.
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 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, which could be just the solution you seek.
7 PARK AVENUE FINANCIAL ORIGINATES COMMERCIAL LOAN WORKOUTS
FAQ: FREQUENTLY ASKED QUESTIONS
WHAT IS A WORKOUT AGREEMENT?
Workout agreements are arrangements between lenders and borrowers in which the terms of an agreement may be renegotiated to better suit both parties. 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. In workouts, the bank focuses on negotiating and managing 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?
A forbearance agreement sets out specific goals and demands by the bank with an attached timeline; if a defaulted loan cannot meet those goals, the loan will be foreclosed on. A forbearance agreement includes specific timelines that allow a bank or other commercial lender to impose remedies for 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 through strategies such as extending maturities, partially writing off the debt, and, in some cases, reducing the 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 around loan's & borrower business issues
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Provides an opportunity to restructure operations within rights
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Allows for strategic planning and growth initiatives
Can a bank workout help me avoid bankruptcy?
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Offers an 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 in the workout agreement
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Provide expertise in negotiation strategies and a focus on an agreement to restructure temporarily or permanently and a focus on the borrower guarantors of the lead lender and subordinate lenders / mezzanine lenders in lender evaluation
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Help identify operational improvements to support turnaround efforts
Statistics
- Canadian business insolvencies fell 21.8% in 2025 to 4,840, down from 6,188 in 2024. bnnbloomberg
- In Q1 2026, 1,232 businesses filed for insolvency, down 7.5% year over year but up 9.8% from the previous quarter. cairp
- Q1 2026 business filings were still 27.6% above the pre-pandemic quarterly average. mpamag
- Q2 2026 business insolvencies were essentially flat year over year, up 0.2% to 1,281 filings. cairp
- The annual business insolvency rate fell to 1.0 per 1,000 businesses in 2025, from 1.1 in 2024. wealthprofessional
Citations
Canadian Association of Insolvency and Restructuring Professionals. “CAIRP: Q2 2026 Canadian Insolvency Statistics.” August 14, 2026. https://cairp.ca/industry-views-news/media-releases/CAIRP_Q2_2026_Canadian_Insolvency_Statistics. Main site: https://cairp.ca
Canadian Association of Insolvency and Restructuring Professionals. “CAIRP: Q1 2026 Canadian Insolvency Statistics.” May 11, 2026. https://cairp.ca/industry-views-news/media-releases/consumer-insolvencies-Q1-2026-canada-highest-since-2009. Main site: https://cairp.ca
Coodin, Lily. “Assessing ‘Lender Liability’ in Workouts.” Torys LLP, February 2013. https://www.torys.com/our-latest-thinking/publications/2013/02/assessing-lender-liability-in-workouts. Main site: https://www.torys.com
American Bar Association. “Strategies for Resolution of Defaults under Commercial Loans.” Business Law Today, February 2024. https://www.americanbar.org/groups/business_law/resources/business-law-today/2024-february/strategies-resolution-defaults-under-commercial-loans/. Main site: https://www.americanbar.org
Norton Rose Fulbright. “Considerations on Forbearance and Enforcement of Security on Canadian Loans.” https://www.nortonrosefulbright.com/en-nl/knowledge/publications/7ab7a672/considerations-on-forbearance-and-enforcement-of-security-on-canadian-loans. Main site: https://www.nortonrosefulbright.com
