After getting your lender ready, there are a number of different kinds of workout structures you can propose. So-called skips are the easiest to understand. They're just what they sound like, an agreement to skip a negotiated number of payments. If the problem is small, you may only have to skip three payments. If the problem is thornier, you might try to negotiate a six-month skip.
Another tack is to get the loan recast. An 11 percent five-year loan for a $250,000 principal balance will cost a borrower $5,345 per month in principal and interest. Let's say, after a year, when the balance is $211,455, the borrower runs into trouble. If the loan is recast, say, with a seven-year term, a tough but attainable time frame, then the monthly payments would go down to $3,620. One point to keep in mind about recasting: A lender may not want to do it, but it may still be preferable to writing down the value of a loan on its books. You've got to use your persuasive powers to get the lender to agree.
As part of a workout, you might promise to pay the lender off in a few months with the proceeds from another loan or equity financing. In return, you get some breathing room to try to solve your financial problem or to find another lender. Of course, if you're in trouble with one lender, why would another step up to the plate? Because there are all sorts of lenders with differing appetites for risk. What makes one lender shriek may be just the kind of deal another lender is looking for.
Finally, Cappello says the gutsiest move you can make is to ask for over-advance financing. In short, what you're doing is asking for more money--at a time when you're having trouble paying what has already been borrowed. Crazy? Maybe. But there may be several plausible situations--say, if a big overseas customer delays, but doesn't cancel, a large order--when an additional dollop of working capital can make the whole problem go away.
Of course, none of this is going to come cheap. You can pretty much count on your lender giving you the cold-blooded squeeze, which is fine as long as you don't take it personally. Cappello says that, as the result of a workout, you can expect to pay points and a higher rate of interest, and to surrender more collateral. Points are usually added to the balance of the loan and are often calculated on the amount of foregone payment the lender is enduring. For instance, if you're skipping six months of payments at $10,000 per month, expect to pay one to three points on the $60,000 you'll owe.
As for a higher interest rate, you shouldn't balk too much (unless rates have come way down since you took out the loan) because you have in fact proven your business loan to be more risky. Cappello says you should never offer to pay a higher interest rate because the banker will get around to raising it sooner or later anyway. Just be prepared for it and recognize that if you are trying to reduce costs, and the lender is trying to help you get there, there's a price to pay somewhere down the road.
Although the process is never pleasant, Cappello says the resolution should be satisfying to all. "In a good workout," he says, "the borrower gets over the hump, the business gets back on track and the lender still has a borrower."
Over at Mike's Famous Roadside Rest, Schwartz is pretty comfortable. Projected sales of $12 million for his dealership--a figure presumably upon which the loan was negotiated and approved--turned out to be conservative. Schwartz estimates he'll do nearly $20 million in his first full year. Still, he says, you just never know what the future might bring.
David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business(Bloomberg Press). Call (800) 233-4830 for ordering information. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public and is a member of the National Advisory Committee for the SBA.
Cappello & McCann, (805) 564-2444, firstname.lastname@example.org
Mike's Famous Roadside Rest, (800) FAMOUS-HD, email@example.com