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Extend the maturity date: Lenders usually prefer extending the maturity date rather than making other changes to a loan because it keeps the loan in fully performing status.
Modification of financial covenants: Relaxing financial covenants written into the loan, such as covenants regarding tangible net worth or coverage ratios, will allow a company more flexibility in dealing with its financial issues.
Interest–only payments: Deferring principal payments for a time and making only interest payments helps the most with older loans that have a large principal component. It is of less help on newer loans.
Defer principal and interest payments: Banks don’t like this – it puts the loan in non-performing status. In certain situations, they may be willing to consider this option if it is for a short period and the bank has good collateral that will maintain its value.
Reduction of interest rate: Banks hate to do this, but they may be willing to consider it in certain severe situations.
Forgiveness of principal or past-due interest: This is one of the least preferred changes to a loan from the bank’s perspective, but a bank may consider it when the outlook for full repayment of the loan is particularly questionable.
Converting debt to equity: This is most likely an option for companies with severe but temporary problems that can demonstrate good long-term prospects, especially where the lender is not a traditional bank.
How bank loans work
There are many reasons someone may be interested in bank loans. Perhaps they have an unexpected home repair that will cost thousands. On the other hand, maybe they need money to help their small business meet increased demand, according to http://www.feex.com.
Whatever the reason for looking into bank loans, there are many banks and financial institutions that are happy to provide bank loans to qualified individuals.
Bank loans, as with most things in finance, are more complex than one might think. Oftentimes taking out a loan at a bank requires physically meeting with a representative. Representatives of small and mid-size banks are not always available at the most convenient times.
In particular, it is important to understand terminologies like “secured” and “unsecured” loans.
Secured versus unsecured loans
It is essential that anyone thinking about looking into bank loans understand the difference between secured loans versus unsecured loans. This has a big impact on how a loan is administered as well as how easy or difficult it is to qualify for one.
A secured loan is tied to a physical asset. Two simple examples of this are home and auto loans. A mortgage is tied to a home, which is why banks will not give out loans for more than what an appraiser values a home at (hence, why an appraisal is typically required before closing on a home purchase). Bankers want to make sure that they will be able to recover the full loan value if the loan goes into default.
Unsecured loans are not tied to physical assets. Many bank loans (or personal loans, small business loans, etc.) are unsecured and are given only to qualified borrowers.
Unsecured loans are riskier for banks because they are not tied to a physical asset, so credit rating is a big consideration when banks are deciding whether to give a personal loan.
You are running a successful business, but you need more working capital to expand, so you go to your local banker. The bank agrees with your forecast of healthy growth and gives you N1m revolving line of credit with a three-year maturity. The bank also asks for your personal guaranty, which you are told is just standard practice and nothing to worry about. All assets of the company secure the line of credit. Your business grows and prospers, according to www.stoel.com.
Now fast forward to September 2008. Lots of bad stuff happens that month. Lehman Brothers files for bankruptcy. Insurance giant AIG sees its stock value plunge almost to zero. The economy in general begins a downward spiral. Your business does not go into a tailspin, but the numbers trend down for the next several months.
Fortunately, your business made it through, and it now looks like you might have turned a corner – numbers were up last month for the first time in almost a year. Unfortunately, the loan matures in a few months and there is a balloon payment that will be difficult to make. And there’s that personal guaranty that has you a little worried in the back of your mind.
What do you do?
Keep the bank in the loop. Banks hate surprises, especially when the surprise is that a borrower may not be able to make the next loan payment. Open and prompt communication with your bank builds trust and credibility. When the time comes for your lender to decide whether to cut you some slack, trust and credibility will almost literally be the equivalent of “money in the bank.”
Don’t wait until your company is in desperate straits (e.g., How are we going to make payroll tomorrow?) to let the bank know about problems. Approaching the bank early not only builds trust and credibility, it gives the bank the flexibility to make concessions that might not be possible down the road.
Poor communication is the enemy. It creates mistrust, raises suspicions and pushes the bank to assume the worst and take drastic actions that may be irreversible and ultimately not in the company’s or the bank’s best interest. Keep the bank in the loop.
Understand what the bank wants
Ultimately, to negotiate successfully with a lender to modify a loan, a borrower needs to understand how banks see the world. Typically, banks have the following three goals when dealing with loan issues:
–Keep the loan in “performing” status
– Continue receiving a “market” rate of interest on the loa
– Have a realistic exit strategy for full repayment of the loan.
The bank will measure any proposal to modify loan terms against these three goals.
Take responsibility for the problem – and the solution
Simply blaming the “bad economy” for your loan problems and throwing up your hands is guaranteed to get your banker worried. To negotiate with the bank from a position of strength and enhance your credibility, it is essential that you identify the problem, take responsibility for it and propose a reasonable solution. This will immediately impress the bank, and it will be much more willing to make concessions on the loan.
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