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.
Content Continues Below
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.
Contact Sources
Cappello & McCann, (805) 564-2444, abcappello@cappellomccann.com
Mike's Famous Roadside Rest, (800) FAMOUS-HD,
customerservice@mikesfamous.com
Page
1 |
2 |
3 | 4