10 Commandments for a Successful Loan Workout

One. Build Credibility

While every lending relationship is based on trust, when you are in or about to be in default with your bank, trust plays an even greater role in the future of your business' finances. If your lender does not trust you, the process of working out your loan will be greatly extended, more time intensive, and will have less likelihood of success. Building credibility from the first contact with your lender regarding your now “troubled” loan (or even better yet, during your entire lending relationship, particularly if your loan officer is the one that handles your workout) will make the process quicker, less adversarial, and less time intensive, and will significantly increase your likelihood of success.

Two. Manage Your Lender's Expectations

Your lender is not going to trust you or believe in your credibility if he/she expects one thing and you deliver something else. Don't try to appease the lender by agreeing to every request when you know you can't fulfill the request. Being truthful up front might be difficult, but it is better than coming up short and harming the trusting relationship with your lender.

Three. Meet Deadlines

If you promise to do something by a certain date, do it. Period.

Four. Keep Your Lender Informed

Keeping you lender informed helps manage the lenders expectations, and build rapport and credibility. If there is a material change in your available cash, projected sales, market conditions or ability to make a promised payment, or there is going to be a delay in getting information to the lender, let your loan officer know. Provide not only good news, but honest news as well.

Five. Return Calls

Nothing (except for misappropriation of funds) destroys a lender relationship and leads to litigation quicker than a borrower that does not return the lender's calls. The lender assumes that the borrower is avoiding him/her and thinks the worst. Return your lenders call promptly. The loan officer is calling because he/she has a question or concern. Even if you cannot answer the lender's questions immediately, returning the call promptly prevents the lender from thinking you are avoiding him.

Six. Be Proactive

Do not wait for your lender to call you if you have something of import, good or bad, to share with him/her. If there is an issue, think of how it will impact your lender's view of your business and frame a solution or approach that demonstrates to the lender that you are working to correct the situation.

Seven. Recognize Your Lender's Goals

Different lenders may have different goals, but remember that they are running a business too. Their priority could be fees, performing loans, liquidity, etc. ' sometimes a lender's goals may be different depending upon internal priorities and what else is happening in their business.

Eight. Make Your Loan Officer Look Good

Thinking like your loan officer and determining what is important to him/her (in contrast to the lender), will assist you suggesting terms that the loan officer will prefer and that will offset other marginal shortfalls from the lender's perspective.

Nine. Understand the Difference Between Business Critical, Important, and Just Helpful

When negotiating with your lender, be sure to be up front about what you need and what you'd like to get in the amended loan documents or forbearance agreement. It is generally more difficult to add terms as negotiations proceed. Know your priorities and be ready to negotiate.

Ten. Know Your Own Numbers, Double Check Them, and Then Triple Check Them

If you provide flawed financial information to your lender, you lose all credibility and the lender then will analyze everything with a fine-tooth comb.

Conclusion

Unfortunately, these rules are very likely going to come into play for far too many businesses over the next couple years. It will be even more unfortunate for those who choose not to follow them.

Andrew Flame is a partner in the Corporate Restructuring Practice at the law firm Drinker Biddle & Reath. His practice focuses on bankruptcy, workouts and collections.

While we obviously have had our fill of difficult economic news the past few years, all signs point to more challenges ahead. Specifically, there are indications that commercial real estate loans are on increasingly shaky ground. A new study from Real Capital Analytics shows that in the first quarter of 2010 the default rate for commercial mortgages held by banks hit its highest level since in 18 years ' and is expected to keep rising for at least another year. See http://www.reuters.com/article/idUSN2426910920100524?type=marketsNews.

Before long, businesses of all sizes will find themselves having difficult discussions with their lenders regarding loans in default or which will be maturing and for which the real estate and other collateral provide questionable value as security. While businesses obviously need to work diligently to avoid these circumstances, they also need to prepare for the worst. With that in mind, here are 10 commandments for a successful loan workout.

10 Commandments for a Successful Loan Workout

One. Build Credibility

While every lending relationship is based on trust, when you are in or about to be in default with your bank, trust plays an even greater role in the future of your business' finances. If your lender does not trust you, the process of working out your loan will be greatly extended, more time intensive, and will have less likelihood of success. Building credibility from the first contact with your lender regarding your now “troubled” loan (or even better yet, during your entire lending relationship, particularly if your loan officer is the one that handles your workout) will make the process quicker, less adversarial, and less time intensive, and will significantly increase your likelihood of success.

Two. Manage Your Lender's Expectations

Your lender is not going to trust you or believe in your credibility if he/she expects one thing and you deliver something else. Don't try to appease the lender by agreeing to every request when you know you can't fulfill the request. Being truthful up front might be difficult, but it is better than coming up short and harming the trusting relationship with your lender.

Three. Meet Deadlines

If you promise to do something by a certain date, do it. Period.

Four. Keep Your Lender Informed

Keeping you lender informed helps manage the lenders expectations, and build rapport and credibility. If there is a material change in your available cash, projected sales, market conditions or ability to make a promised payment, or there is going to be a delay in getting information to the lender, let your loan officer know. Provide not only good news, but honest news as well.

Five. Return Calls

Nothing (except for misappropriation of funds) destroys a lender relationship and leads to litigation quicker than a borrower that does not return the lender's calls. The lender assumes that the borrower is avoiding him/her and thinks the worst. Return your lenders call promptly. The loan officer is calling because he/she has a question or concern. Even if you cannot answer the lender's questions immediately, returning the call promptly prevents the lender from thinking you are avoiding him.

Six. Be Proactive

Do not wait for your lender to call you if you have something of import, good or bad, to share with him/her. If there is an issue, think of how it will impact your lender's view of your business and frame a solution or approach that demonstrates to the lender that you are working to correct the situation.

Seven. Recognize Your Lender's Goals

Different lenders may have different goals, but remember that they are running a business too. Their priority could be fees, performing loans, liquidity, etc. ' sometimes a lender's goals may be different depending upon internal priorities and what else is happening in their business.

Eight. Make Your Loan Officer Look Good

Thinking like your loan officer and determining what is important to him/her (in contrast to the lender), will assist you suggesting terms that the loan officer will prefer and that will offset other marginal shortfalls from the lender's perspective.

Nine. Understand the Difference Between Business Critical, Important, and Just Helpful

When negotiating with your lender, be sure to be up front about what you need and what you'd like to get in the amended loan documents or forbearance agreement. It is generally more difficult to add terms as negotiations proceed. Know your priorities and be ready to negotiate.

Ten. Know Your Own Numbers, Double Check Them, and Then Triple Check Them

If you provide flawed financial information to your lender, you lose all credibility and the lender then will analyze everything with a fine-tooth comb.

Conclusion

Unfortunately, these rules are very likely going to come into play for far too many businesses over the next couple years. It will be even more unfortunate for those who choose not to follow them.

Andrew Flame is a partner in the Corporate Restructuring Practice at the law firm Drinker Biddle & Reath. His practice focuses on bankruptcy, workouts and collections.