Trouble with your lender? All may not be lost
To many founders, small business owners, and managers, dealing with lenders and the power that they wield may be a daunting task. In many respects, it may appear that lenders operate by the Golden Rule: “He who has the gold, makes the rules.” And looking over loan agreements may support that notion. That’s particularly true when the agreement is with someone other than a major or traditional bank. The terms and conditions that come attached to loans can give lenders enormous power both within the court system, and perhaps most surprising to many borrowers, outside the court system.
Understand your lender’s rights
Over the past decades, lenders have only increased the conditions they place on borrowers. Loan agreements can be hundreds or even thousands of pages and be a collection of multiple documents and agreements among various parties. This is true even for small businesses and even for relatively modest amounts.
Additionally, loans that are considered higher risk not only come with higher interest rates, but bring with them entirely different conditions. They also commonly involve lenders with wholly different business philosophies, expectations, and approaches toward their borrowers. It is not uncommon for a business and its managers to believe that they have a close, cooperative relationship with their lender, especially if they have been making their periodic payments.
Things can get ugly fast
That all can change and change very rapidly as a loan matures, and the business is not in a position to pay off the loan. Of course, the reason the business is in this position plays a large role in how it strategizes, plans, and attempts to reach a resolution. Regardless, if there is a need or a sufficient business reason for seeking an extension, forbearance, or some alteration to the loan or the relationship with the lender, it is important to act quickly, decisively, and follow some basic rules.
Know your lender
First and foremost, it is important to understand your lender: its philosophy, business model, and expectations during the good times and to prepare for loan maturity. If you wait until maturity, it may be too late. In very short order, you can find your business fighting for its life.
Understanding your lender includes, among other things, knowing their business model, their relationship with their investors, and their business practices in the past when dealing with similar situations. For example, get to know their attitude toward extensions or forbearances. Learn whether they are even open to such arrangements and if so, the information and assurances they need to enter into them along with any additional conditions they may want to impose on your ongoing business. If not, investigate any options to which they are open.
Know what you can do
Next, you need to figure out whether you can accommodate your lender. If not, you should investigate other options and seriously consider employing a professional with experience in options and workouts. There are entire industries that have been created around these issues and lenders are at a great advantage since when default situations arise, and they typically have far greater resources than borrowers.
There is a tendency to view such situations in terms of the borrower being the cause of the default through irresponsibility or even incompetence. Specifically, that the borrower somehow conducted business poorly or improperly resulting in the default. At the same time, the lender is commonly viewed as the victim of such ineptitude or impropriety. In reality, a variety of factors could have caused the default, among them or even chiefly, the lender and its conduct.
At the same time, over the years, lenders and creditors have created many advantages for themselves not only in the court of public opinion but inside the real court system as well. It is without question that once a loan matures or there is a default, the onus is on the borrower both in terms of public perception and the legal system.
This is why business owners must act swiftly in consulting experts in the field, and this means more than just talking to your lawyer. The business owner must consult experts who are able to address and manage the issue in various arenas, not just the legal system and not just in terms of PR. Further, the business owner must be able to budget appropriate resources and find ways to put in place alternative payment arrangements for the apparatus needed to level the playing field.
Once there is sufficient understanding of the lender, and there is an expert in dealing with such matters on the team, the business is still far from being out of the woods. Now comes the time for action. The borrower must be strategic, have a plan, and execute that plan. Also, it is important to take steps to assure as little business disruption as possible. Going to battle with a lender can be incredibly taxing on businesses and their owners, as lenders – by contract and by law – have a variety of options at their disposal, which can be virtually debilitating for the borrower.
Loan maturity or major default events are serious matters and can lead to devastating consequences, and even doom a business. For this reason, businesses must anticipate such events, and get ahead of them by bringing in expertise that can handle and manage the issues they present both inside and outside the legal system.Read More: 5 common mistakes when seeking a business loan