Three’s Company: You, Your Lender and Your Loan, Getting Back on Speaking Terms

When you find your company facing significant financial headwinds, bankruptcy should be your last option. There are preventative measures you can take, before bankruptcy, to protect yourself, your assets and the business.

Bankruptcy should be a last resort, only elected if there are truly no other options, but must be considered with all other possible courses of action. Contacting your banker is one of the most critical steps to take if you are going to default on your loan either via covenant violation or missed payments.

Be Proactive

Before assuming bankruptcy is the only option, gather your information and formulate a plan before going into your bank. Give yourself and the banker enough lead time to make an informed decision rather than simply reacting to bad news– it may just save the loan. It is important to have all of the information you need to support your business case and go forward with a plan. Offer a clear and concise description of events that caused the distress, provide forward cash flow budgets, and a realistic forecast, as well as a comprehensive plan to mitigate the damage and return to compliance. Think of questions your banker might have ahead of time, and be prepared to provide alternatives.

Your Development Plan

Take a hard look at your business plan.

  • Ask yourself: What are the issues driving the financial distress?
  • Do a deep dive into the business model cost structure. What are your fixed costs? What are your variable costs? What costs are discretionary?
  • Prepare a 13-week cash-flow projection and build in contingencies.
  • Assess your management. Do you have the right people in the right places?
  • Assess the product or service lines. Do you need to terminate service lines that are not profitable?
  • Bundle all of your findings in a ready-to-present plan, including alternatives.
For questions or further assistance, please
contact a member of Withum’s Forensic and Valuation Services Group.

Presenting Your Plan

When presenting to your banker, you have to articulate what you need from the bank. You will want to clearly explain why they can’t or shouldn’t freeze or eliminate any remaining unused credit, or worse—call the loan. To secure your plan or restructure the loan, your bank may expect you to provide additional collateral. Be prepared with a personal balance sheet.

In the event that your efforts fall short, you can use your trump card: bankruptcy. If you file, even if you liquidate, it is likely that your bank will not receive nearly the same amount of money as they would if your plan is successful. Present your liquidation analysis last, as this is the key to your argument.

On the Future

How will you ensure that your business will not sail back into troubled waters? If you succeed in preserving your loan but do not address the root cause of the problem, you could find yourself once more in the same place. A detailed, unvarnished assessment of the issues confronting the business, as well as the rationale for changes you are making, whether it be a change in management, staffing, product mix or a Sale of Assets, and what you hope to achieve included in your plan will enable you to be credible and put you in position for the best chances of success.

They say breaking up is hard to do, by doing your due diligence and being proactive with your banking relationship by preparing a complete, comprehensive analysis of your business and your future forecast, you won’t even have to consider bankruptcy.

Forensic and Valuation Services

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