Fire-Proof Your Business Loan, Now, before It Is Too Late
“In a 10 year business cycle you will have six good years, two great years and two horrible years that can put you out of business.”
-Gino Wickman, Management Consultant, Creator of the Entrepreneurial Operating System (EOS) and author of Traction: Get a Grip on Your Business – Quoting Sam Cupp, a mentor of Gino’s.
Will your bank relationship survive those two horrible years that can put you out of business? If your bank relationship doesn’t survive, then you might not survive.
When you experience a downturn, your bank has veto power over the continued existence of your business. Banks exercise this veto power all the time. And it isn’t just a matter of switching banks if your current bank uses its veto power. When you are fighting through those two horrible years, you may have great trouble refinancing with any other bank.
It is extremely important to structure your ENTIRE banking relationship so that you have the maximum chance of:
1. Surviving when the bank calls your loan, or
2. Protecting yourself personally if your business doesn’t survive.
I call this process Fire-Proofing Your Loan™ and it goes way beyond a simple legal review of your loan agreement. Not that a legal review of loan docs isn’t a good idea, but the issues involved are much bigger than what is contained in your loan agreement.
The process starts with bank selection. Most people select their banks for the wrong reason. When your business is in a downturn and your bank calls your loan, your business is placed into “Workout”. Some banks are brutal and cutthroat in Workout while others are tough but fair. This one measure of a bank’s Workout culture is the most important factor in choosing a bank. All commercial loan officers will tell you how wonderful their bank is. All will give you story after story about how they stuck with a client who needed help in a bleak situation.
Most of these loan officers are lying. To be fair, most of them honestly believe they are telling the truth…and there is a kernel of truth in what they say. But most of them are talking about accommodations that were made before the client was tossed into Workout. After a client is placed in Workout, all bets are off. Even if you have a great relationship with the loan officer, he or she often can do nothing to help you. When your loan is moved to Workout, it is often completely removed from the hands of your former loan officer.
Personal Assets and Business Ownership
Bank selection is just the beginning. Next, a business owner needs to consider how his/her personal assets are titled and how his/her business is titled. There are certain aspects of banking regulations that help protect a business owner if he/she has done the right work with regard to these ownership issues.
Personal Guarantees are often a sticking point with business owners. But most owners are unaware of the various kinds of guarantees that can be negotiated. Often, an owner can end up with one of several different forms of a guarantee that is less onerous than the one the bank shoves at you. There may even be a way to eliminate your personal guarantee over time. If you are fortunate enough not to have a personal guarantee, you are still not “out of the woods”. There is still action you need to take now to protect yourself should your bank stuff you between a rock and a hard place.
Finally, there is the loan agreement. If you have not addressed the above issues, don’t expect your lawyer to transform this sow’s ear into a silk purse. Without first addressing the above issues, your lawyer is reduced to merely certifying that the loan documents faithfully represent the lousy deal you just made. Of course, your lawyer won’t put it in those terms, but that is the reality.
If you, like most borrowers, have not taken all the necessary steps prior to signing a loan agreement, contact me. It is time to Fire-Proof Your Loan™.
Taking Action after Being Placed in Workout
If you find yourself in Workout, don’t give up hope. Some businesses do survive to fight another day. Ultimately, you need to demonstrate that you are serious about fixing the problem. The Bank is constantly assessing whether to liquidate you now, before your collateral deteriorates – or whether they should let you operate so the bank gets repaid in full. Without solid action being taken, the bank has no reason to bet on you.
There are three things you need to do quickly:
1. Be honest with yourself as to why you are in Workout. You are there for a reason. Has that problem really been fixed? If you are just hoping that things will turn around because they always do, then you don’t have a plan – and your bank will be more likely to liquidate the collateral for repayment of the debt.
2. If you do have a plan, think deeply about how you communicate this plan to the bank. Remember, everyone tells the bank that the problem has already been fixed and the bank has made a mistake in placing you in Workout. When you say this (even if it is true), your bank thinks you are in denial. You need to:
(A) Agree with the bank that the situation is serious
(B) Tell the bank exactly how you got into this mess and what you have done to fix things
(C) Tell the bank what remains to be done along with a time-line for action
(D) Ask the guy handling Workout if he has any thoughts on corrective actions that you have not yet identified.
(E) Get outside help. Often the people who “rode the business down” with you are not the people who can help extricate you from this mess.
3. Get a handle on your bank’s reputation in handling Workout. Is this a “bad” bank (that liquidates most victims)? Or, is this a “good” bank (that is willing to work with borrowers who have a reasonable chance)? Don’t bother asking your loan officer this question. They will all reassure you that their bank is one of the “good ones”. The answer to this question will determine what steps you take from here.
To survive Workout, you will need:
• A good financial turn-around adviser and your commitment to take action quickly.
• Good legal advice – from a lawyer who does a lot of bank work. If your regular lawyer doesn’t do this kind of work, get a recommendation for someone who does.
• Good bank negotiating advice. This is my specialty. If you need help, give me a call.