Cappello says that approaching the bank about a loan workout assumes the bank is ready to deal when you're in trouble. Unfortunately, what you may find when you inform your lender you're anticipating money problems is that the bank may call in your loan early. If this happens to you, a loan workout is probably no longer an option and you may have to seek a legal remedy against promise to pay the lender to protect yourself.
In truth, however, most lenders don't want to foreclose on a loan. A foreclosure involves litigation. There may be environmental liabilities involving repossessed property. Collateral will have to be sold at fire-sale prices. Indeed, the situation can be a lot harder for the bank than simply working out new terms with the borrower.
Before even suggesting a workout to your lender, however, you've got to decide whether the problem that's making your loan difficult to repay is temporary or permanent. If the problem is permanent, the workout may not help, and bankruptcy may be your only alternative. But if the problem is temporary, you've got wiggle room.
The first step in the process is to meet with the lender to let it know you see a problem coming and that some changes to the loan will be necessary to prevent the situation from getting worse. "It's important to talk to the lender as soon as you can," says Cappello. "Obviously it's better to see a tidal wave on the horizon than it is to see it on the beach."
Letting the lender see the stark reality, however, might spook it into moving against you. Cappello suggests two strategies to prevent this.
First, let it drop in the initial meeting that you've met with counsel, and based on financial projections, he or she thinks a workout is viable. It's the old velvet hammer. "Basically," says Cappello, "by meeting with counsel and letting the lender know it, you're telling [the bank] you have the ability and the inclination to fight a foreclosure."
Now that you have your lender's attention, it's time for step two: Bring to the meeting a financial forecast showing what sales you expect the business to generate during the next year or next several quarters, how you plan to cut back on costs and how the bank can help. And don't forget to document your financial assumptions with footnotes.