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.
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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.
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