Most business owners have little idea what options they have when it comes to renegotiating the terms of the loan they got from their SBA lender. That matters, because if you are seriously delinquent on an SBA loan, or the loan has been put into liquidation status, the lender (or the CDC) has to come up with a prudent, commercially reasonable strategy to maximize its recovery. Before it liquidates collateral or pays for litigation, it is supposed to make a good faith effort to negotiate a workout agreement with you first. So if you come prepared and manage the situation effectively, there are a number of potentially favorable options for you and your business. The first step is knowing what the options are.
Think of a workout as a temporary “treaty” between you and the lender. For a lender, a workout is a plan or a strategy to recover as much of the debt as possible. For you, the business owner, a workout is an opportunity to restructure your debt. A workout plan is a new agreement to which the borrower and lender agree to modify the terms and conditions of the existing loan. Under the SBA’s servicing rules, the point is to avoid foreclosure or bankruptcy, to let you cure the default and improve your ability to repay, and to let the lender get back as much as it can.
Prepare for the Paperwork
But how do you prepare for the paperwork? And what should you discuss with your lender? The facts should always come first. When it comes to SBA loan workouts, your decision should be based on reality. To start, you must be cooperative and you must provide a current financial statement (SBA Form 770 is perfect, or just a financial statement signed under penalty of perjury showing your assets, liabilities, income and expenses). Add your last year-end financial statements. If you’ve got business affiliates, you should also provide your most recent consolidated statement. You need to supply complete copies of the business federal income tax returns for your business and each of its affiliates for the last two years, or a written explanation why you can’t. You also need to supply complete copies of your personal federal income tax returns for the last two years, or a written explanation why you can’t. The lender uses all of this to decide whether a workout is feasible and how to structure it. Before you contact your lender, take a step back and look at where you stand.
Once you’ve provided all that, the lender will examine the financials, review the loan documents, and visit your site. There are many factors that determine how a lender will evaluate your default and what solutions they are likely to offer. Each case has unique circumstances. But a workout is only considered feasible if you are
- (1) competent (have the skills necessary to run a successful business),
- (2) cooperative (willing to take all necessary action to remedy the situation that caused the default),
- (3) in good faith, and
- (4) financially and operationally viable.
Cooperation is the one owners underestimate. That is a big word for a common sense behavior: People will help you if you take actions that benefit them. If the business is not viable, there’s a real risk the lender won’t work with the owner.
Common or Likely Workout Options
Here are some of the more common or likely workout options that may be available to business owners. Some of these options, which are essentially some different ways you can restructure the loan, may seem fairly obvious. The first is forbearance of collection activities. Basically, forbearance is when the lender “holds fire” to give a borrower time to straighten out cash flow problems to avoid foreclosure. It does not erase debt, but it can buy you breathing room. If the lender has already accelerated the note, the maturity date can be reinstated. Principal and/or interest can be deferred for a stated period of time to provide a borrower relief from cash flow problems. The lender may also modify repayment terms, such as lower interest rate or extending the maturity date.
The lender can also allow another person to assume the loan. It can agree to subordinate lien position to a short-term working capital loan. Also, a lender may decide to have a senior lien loan on the same collateral kept current, purchased or paid off. A borrower may voluntarily agree to sell all or part of the collateral. The lender should monitor the sale closely to ensure it is commercially reasonable, and to ensure all net proceeds are applied to the SBA loan principal or used to facilitate the workout plan. Which of these you get depends on your position with the lender and how well you handle the negotiation.
Workout Agreement
If you reach a deal, it has to be in writing. A workout agreement is a document that both you and your lender must sign to restructure the terms of a delinquent SBA loan.
- At a minimum it will recite all the defaults to date, and you will have to acknowledge them.
- You will need to give the lender consideration for entering into the agreement.
- You will need to confirm the collateral and the priority of each lien.
- You will need to agree that neither the SBA nor the lender/CDC waives any of the defaults or other rights and remedies.
- You will need to agree on the workout option(s).
- You will need to agree on the events of default under the workout agreement, including the dates by which you must perform each obligation under the agreement.
- You will need to agree on what will happen if there is a default under the workout agreement (e.g. bill of sale, re-acceleration of the note). For example, the workout agreement may specify that, if you haven’t made the final payment under the workout by a certain date, the lender can re-accelerate the original note.
- You will need to sign the agreement with the lender/CDC, and all obligors will need to sign as well.
- And if you have a CDC loan, the agreement will also include the order in which payments will be applied to the amounts owed, and the amount of reinstated CDC servicing fee, if any, after the return to regular servicing.
That second item, consideration, is the one owners tend to miss. Now this certainly doesn’t mean that you can expect to negotiate a workout without concessions. The agreement is binding only if there is a bargained-for exchange, which means you give the lender something of value before or at the same time it receives the benefit of the deal. You have to give something in return for it. The bank will say that you must make a concession as a condition to it agreeing to renegotiate terms. That might mean correction of errors in the loan documents, waiver of defenses, release of lender liability claims, or additional collateral. Whatever form it takes, the consideration has to be written into the agreement.
If the workout has you resuming regular payments, the lender should return the loan to regular servicing status. The sooner you get to a SBA loan workout with your lender the better. It is much better to show proactive interest in fixing things before the bank even contacts you. The key is a stable approach that can give you time. Time to regroup, reorganize and ultimately thrive again.
