Small Business Loan? Mortgage?

02 Feb 2009 @ 7:57 PM

Small Business Loan? Mortgage? – Renegotiate!

In this 21st Century world, small business owners, homeowners and consumers are likely to find that even the best financial plan, the best debt management system and the best business model will not prevent a financial crisis.

If the business or individual seeks to survive and recover financially, a financial workout, a renegotiation, whatever it may be called, is often the most important step toward financial sanity. But how to do it?

Protactix sets out the steps to be taken in order for the renegotiation to have the best chance to succeed.

Hopefully whether one is a business or an individual homeowner or consumer, the borrower has a business plan. If there is no plan, as we will see later, one is required.

First things first

1. Stay current with the lender. Contact the lender before default. (if the default is not yet serious, not too far behind, contact the lender now!)

2. At no time should the lender be threatened. Be realistic with the lender, be calm with the lender, but no threats, please.

3. It’s not a threat, but carefully calculate the cost to the lender if a default occurs. In the calculations, include, at least, a realistic picture of the liquidation value of the collateral. Review, for example, Barel Karsan’s thoughts at http://barelkarsan.com/2008/08/amisco-liquidation-value.html or http://www.smallbusinessnotes.com/operating/finmgmt/assetliquidation/value.html

The point is that the lender must be made aware of the reality that its collateral, particularly if the collateral is real estate or construction work in process may well be worth less than the outstanding loan balance.

This might be a good time for the borrower to mention gently the amount of interest that the borrower has paid in the past, which almost certainly contributed to the the lender’s past profits

4. As a corollary, the borrower should be prepared to emphasize to the lender the profit or the diminished loss the lender will face if it agrees to the proposed workout. This point cannot be overstated in view of the (December 2008) current cost of funds that lenders are paying.

5. After laying the groundwork upon the preceding points, the most important part of the presentation is the borrower’s business plan. In short: demonstrate to the lender that the only way they can win is if they renegotiate.

How? The following must be included, and these components must be real and defensible.

a. Sales projections that will sustain the borrower. (if the borrrower is an individual rather than a business, the borrower should include increased income sources: additional jobs, liquidation of other assets, etc.)

b. Cost savings. Include specific steps and numbers reflecting the savings.

c. Revised/improved profit margins. Really just a minus b (above); But it’s important to spell out the details. Don’t rely on the lender reaching the proper conclusions.

d. In the case of a business, new market opportunities. Mention in a much detail as necessary. Include new products and new market territories.

e. Demonstrate specifically the impact of the lowered interest rate, increased loan term, and/or new money at a lower rate for a longer term that are the object of the renegotiation and detail how the more favorable terms will enhance the certainty (the lender will hear possibility) of the renegotiation being successful.

f. Throughout the presentation emphasize the sacrifices the owner, borrower or homeowner will make to facilitate the sucess of the workout. Lower take home pay, reduced standard of living, fewer meals out, etc.

g. Timing. How long will it take to achieve the goals of the workout? The lender will require a specific timetable supported by all the foregoing.

6. Once there is agreement, make the plan happen. This will be a one off opportunity. If the borrower does not keep its end of the bargain, expect no sympathy.

Details:

1. The workout proposal must be written and can only be presented in person.

2. The workout proposal must be made to a person (preferably more than one person) who is the decision maker or one or more of the decision makers. It does no good to present the package to a friendly teller at the bank.

3. If there is follow up after the meeting, make the follow up in writing, either by writing (use Fedex or UPS overnight) or by e-mail (keep a copy) and follow the email with a writing confirming the email.

If you like, you may email your presentation to jim@morgenstern.com. We’ll email you our helpful comments.

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