Negotiating with Banks: 10 Tips For Struggling Businesses
With the right strategies, any commercial borrower can maximize the chances for a successful reset with its Lender
Borrowing is a fact of life for most businesses. Even the most conservatively managed company can experience a cashflow crunch when hit with the wrong combination of changing market forces, competitive threats, or black swan events. When challenges lead to actual or potential loan defaults, action is required. With the right strategies, any commercial borrower can maximize the chances for a successful reset with its Lender.
1. KNOW YOUR LENDER
It is critical to know what type of Lender holds your loan. Some Lenders are able to exercise much more flexibility than others. Some are hesitant to set precedent by making concessions for one borrower because it would set precedent for dealing with other borrowers. One thing all Lenders have in common is that they really do not want to become the owner of their borrower’s collateral. Your Lender wants to maximize its recovery of the loaned funds and knowing what is important to your Lender can help both of you reach your goals.
2. KNOW THE TERMS BEFORE DEFAULT
Review all financing documents and carefully choose where to ask for flexibility. Some key items to consider include:
(1) Financial Covenants—will the business be able to make all upcoming payments? If not, make arrangements in advance of default.
(2) Nonfinacial/Reporting or Performance Covenants—are there any financial or other benchmarks (% sales, accounts receivable) that are upcoming that might be missed? Discuss with Lender before they happen.
(3) Other Provisions—consider impacts of cross-collateralization and cross-default provisions, default interest provisions, and other specific limitations/triggers in the loan documents.
3. HAVE A PLAN
Be prepared. Go in with a plan instead of asking the Lender to propose a solution. Have businesses financial information readily available and updated including liquidity needs, cashflow needs, and other specific information in your industry. Any business plan presented to the Lender should clearly lay out a plan going forward, should be precise in its goals, set forth the means of implementation, and be achievable. Be prepared to discuss either new equity from ownership or other means of capital restructure to show ownership commitment.
Once a borrower is on a Lender’s radar for potential issues, the Lender wants 3 things: information, information and more information. Even when a borrower wants to respond to voluminous information requests, management must stay focused on the day to day running of the business. If information is not provided (or not provided promptly/in the requested form), a Lender may heighten its scrutiny of the borrower. This situation of lack of communication can spiral out of control quickly and is where the borrower’s professional team (See Tip # 10) can provide significant value by stepping in and handling the majority of communications with the Lender. This allows key members of the borrower’s team to focus on the business rather than responding to Lender information requests. Keeping the lines of communication open and robust helps the Lender see that the borrower is being diligent about its loan obligations.
5. NEGOTIATING AFTER DEFAULT
If default is imminent or has already occurred, the business can try to negotiate with the Lender by asking for concessions such as:
(1) a payment suspension (likely with payments added back in at the end of the loan);
(2) permission to sell collateral or other assets;
(3) flexibility on payment or enforcement while working toward takeout financing or raising additional capital.
6. FORBEARANCE OR STANDSTILL AGREEMENTS
Default often leads to negotiation of a Forbearance or Standstill Agreement. The Lender will likely seek some harsher terms in exchange for flexibility. A borrower should only agree to restrictions that are in proportion to the advantages of buying more time, and provide a meaningful chance for the business to recover and thrive. If possible, a Forbearance Agreement should be specific as to:
(1) time period covered
(2) cross-default provisions
(3) guarantee enforcement
(4) payment amounts
(5) financial and non-financial covenants
(6) whether the loan is permanently modified, and
(7) other limitations such as borrowing, selling, or transferring assets
7. BOARD OF DIRECTORS CONSIDERATIONS
Board members should be well-informed, meet regularly, and document all business decisions as a business approaches the “zone of insolvency”. Under Tennessee law, and in most other jurisdictions, it is well established that officers and directors of a corporation owe a fiduciary duty to the corporation and its members and, while occupying such a position of trust, must act in the utmost good faith. When a business is in financial trouble, corporate officers and directors may also be deemed to have fiduciary duties to creditors. In Tennessee, a creditor of an insolvent corporation, or a corporation on the brink of insolvency, may assert an action for breach of fiduciary duty against officers or directors of the corporation who have given themselves preference in the payment of debt or who have engaged in "self-dealing" conduct. Directors and officers must use extraordinary care to avoid even the appearance of self-dealing.
8. IN THE LANDLORD TENANT SETTING
Commercial tenants should have a good understanding of the terms of the underlying lease as well as options for restructuring lease obligations both inside and outside of bankruptcy. Outside of bankruptcy, completing an in-depth analysis of the impact of alterations to lease obligations can help develop a working list of negotiating points to discuss with the landlord. If a bankruptcy case is filed, the Bankruptcy Code gives the debtor tenant 120 days to decide to “assume” (i.e. keep the lease and retain the benefits) or “reject” (i.e. terminate) the lease. The court may, for “cause” give a debtor an additional 90 days to make such a decision.
9. REVIEW GUARANTY AGREEMENTS
Did you know that simply amending a lease without informing your Lender can trigger guarantor liability? Borrowers should be aware of the various provisions in any guaranty agreements. It is critical for borrowers to comply with the terms of those agreements and minimize the potential for default that would result in significant guarantor liability.
10. ESTABLISH YOUR TEAM
Borrowers should engage restructuring counsel as soon as management realizes there are even potential problems. Do not wait for an actual event of default or even just an uncomfortable conversation about covenants with your banker without having your team in place. Having legal counsel and financial advisors with an understanding of your business and the issues it is facing will allow you to develop a game plan and negotiate with the Lender much more efficiently than if the business tries to just make a go of it alone. Having the right support will also make it possible for management to remain focused on the most important thing – running the business.
EmergeLaw, PLC is a boutique law firm focused on business bankruptcy, corporate reorganization, and creditors' rights. Serving clients throughout the Southeast, our experienced attorneys represent debtors, committees, secured and unsecured creditors, investors, avoidance action defendants, and every other constituency in commercial bankruptcy cases, out-of-court workouts, and other complex matters where insolvency is an issue.