Protactix

After talking with more than one (and less than fifteen) bank officers and business owners, my take is that reality has set in.

Reality for me is that banks have realized that they are not very good at businesses besides banking.

OK, I know, it may be true that banks aren’t even very good at banking, but hold that thought for now.

This means what? Let’s talk first about construction/development and other small business loans.

Some time ago, (how long ago varies from industry to industry and depends also on the area of the country), banks believed that loan defaults were caused by deadbeats or profligate spenders.  Banks universally abhor deadbeats and profligate spenders.

The result: a search and destroy approach to loan collection.  For a while in late 2007 and early 2008, the aggressive gun-slinger special assets officer was the hero.  The attitude was “nail the deadbeats”

Unfortunately for all of us, including the banks, the economy got worse.  Many borrowers, although current on their loan payments,  became “defaults” simply because the collateral the bank held as collateral lost value and lost value and lost value.

This downward spiral not only affected the property owned by borrowers, but also the “repossessed” property owned by the banks.

What is even worse for the banks was and is that bank owned property is worth even less than identical property held by a non bank owner.

Why?  First, banks aren’t good at owning and maintaining  physical assets.  They don’t have the staff or the expertise to maintain a house or a piece of machinery so that it can be resold at a price to recoup the banks’ investment.  Second, time is not on their side.  They are not permitted, in some cases by regulatory requirements, to hold repossessed assets for more than a relatively short period of time.     Even if they can hold certain assets for some period of time, these sorts of assets cannot produce even a small amount of ongoing revenue, especially bad when banks need all the revenue they can get.  Banks typically can’t wait for the economy to turn around to sell assets that are otherwise depreciating.

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In these times, cash is king.  In other words, nobody can be sure that they will be able to borrow money today or tomorrow.

But if you have some cash, and you can borrow, borrow full speed ahead.

Leverage is the way to future gain. 

There is not any way that inflation won’t happen going forward.

What does that mean?  Whatever you owe, the dollar will be worth less in the future than it is now.  As long as you have a job, you will be making more in three years than you are making now…for the same job.

If your debt is fixed, even if your interest rate is not, you will pay your loans off with future dollars that will be worth less than today’s dollars.

To keep it simple, say you make $25 per hour and you owe $100.  Right now, if you work 4 hours, you will pay off your loan in full (forget interest for now).

But since the government is, and will continue to flood (borrowed) money into the economy (the Stimulus), pretty soon you

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

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