Archive | March 2014

Commercial Real Estate Short Sales

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Before the economic recession, revenues were high and businesses were expanding.  Part of that expansion resulted in many small business owners purchasing commercial real estate.  This was seen as a smart way to invest excess capital and also served as tax planning because business owners experienced depreciation and maintenance write offs that would cancel out gains experienced from their operating business.  However, for those who purchased commercial real estate just before or since the recent recession, they are facing a much different economy today.  The once good investment is just another financial obligation that the business cannot support and the rental market does not provide enough rental income to support the obligations associated with the property.  Additionally, many businesses are running at a cash loss or break even point in today’s economy so they do not need the additional tax benefits of owning real property.

The economy has changed and now the business is likely more suited for a rental relationship where costs are fixed and affordable.  Rather than deal with large and sporadic maintenance costs on top of debt service, a rent rate for a smaller place in today’s rental market is much more affordable.  Yet the business has established goodwill in its current location.  The customers and clients know the business address, the building, or the store front and moving can often affect the overall performance of the business.  This leaves business owner liquidating their personal assets in order to support their debt service in hopes that the commercial real estate market will improve, along with the rest of the economy.  When those funds run out, they are faced with few options outside of foreclosure and auction.

There is another plan.  An option that may allow the business to stay in it’s current location.  It is known as a commercial short sale. With the value of commercial real estate still being lower than it was before the economic recession, investors are looking to purchase properties at today’s values, and rent them until the market improves.  Properties with willing, paying tenants are more highly sought after.  Rather than letting a commercial property go to auction, or relocating a business to a different space which could affect business performance, a short sale can allow all parties to be satisfied.  The investor buys a property at a good value with a paying tenant in place, the bank gets to liquidate the property for appraised value without having to go to auction, and the business owners gets to maintain a rental agreement for the commercial space they are currently using to run their business.

There are certain aspects that must be achieved in order to get a short sale approved.  They include:

1. Determining the liquidated value of the property – Banks will only accept values supported by third party appraisals
2. Determine any cross collateralization or owner occupancy requirements – Many business owners will have multiple loans outstanding with their businesses.  These loans could have terms and conditions that would be violated by a short sale, which could cause defaults on multiple loans with multiple creditors.
3. Understand the local rental market – Not all rental markets are the same.  In some areas renting may outweigh the cost of ownership and therefore a short sale would not create value for the business owner.
4. Agreed upon closing statement or HUD-1: A closing statement must be shown to the bank which shows all sales proceeds going to the bank, and none going to the seller.  The nature of a shot sale is that the property is sold for less than what is owed and therefore the secured creditor has the rights to all sale proceeds.

If these conditions are met and satisfied, a short sale is an option that can provide relief to small business owners.  It is important that you find the right investor for the property and that you and this investor share similar goals for the property, which include your right to lease and operate within the space.  The solution not only will save the business, but it will greatly pay down the deficiency owed by the guarantor, and will satisfy the bank by giving them a cooperative solution with a quick closing.

If you are experiencing trouble with your commercial real estate, contact us to determine if a short sale is the best course of action for you.

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State by State Protection

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State by State Debtor Protection

This link leads you to a list of debtor protection and creditors rights, organized by states.  Most of this information was found and can be verified HERE. Please understand that this information is subject to change over time.

When considering a debt workout, a modification, or a restructuring of any kind, a guarantor and business owner should be aware what state laws and protections may be in place to protect them from collection from creditors.  Likewise, they should know what right the creditors have to collect on their personal asset base.  This chart is an attempt to provide some of the information necessary to understand these conditions.

Not knowing this information could lead to guarantor to lose assets that they thought were protected.  For example, some people are under the assumption that all retirement accounts are protected from collection.  However, if a defaulted guarantor made that mistake about their IRA in the state of California, they could lose all of their retirement savings.  On the other hand, a guarantor in Texas who earns a W2 wage should be aware that wage garnishment is not possible in that state and therefore the bank’s and SBA’s opinion of the person’s future ability to repay should decrease significantly. Before entering into a workout or any other negotiation with a creditor, it is highly advised that you have your personal balance sheet reviewed for potential exposure

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Secured Debt Workouts

images (1)What is the difference between a secured loan workout with traditional commercial financing one done with SBA financing?

Simply put, the involvement of the SBA. A traditional commercial loan is based solely on the value of the business collateral and the perceived ability of the guarantors to repay the loan.  There is no SBA guaranty backing the loan in the event that the business fails and needs to be liquidated.  What this means is that the risk is shouldered by the bank rather than the SBA.

What does this mean for distressed borrowers with traditional commercial financing?  Can they still do a workout?

Business owners with traditional commercial financing can still go through a workout, a modification, or a reorganization.  However, because the bank does stand to lose more than they would under a SBA financing relationship, it is important that a business owner be aware of the Pros and Cons of of doing workouts with these types of lenders.

PROS:
Timing: Because all decisions can happen at the bank level without the need for involvement from the SBA, a workout or settlement can conclude much more quickly than the typical SBA loan.
– Flexibility: A bank without a SBA guaranty may allow more temporary payment relief in the forms of forbearance or modifications than a SBA loan would because they have no fear of losing their guaranty and having every incentive to keep the loan out of liquidation.

CONS:
– Valuation of Assets: Under a liquidation scenario a bank with no SBA guaranty has an incentive to seek out a higher value for the assets that act as underlying collateral for their loan.  While the intension of paying down the deficiency balance to a higher extent is good, the outcome many times is that the opinion of value of the business assets makes them unmarketable to third parties.
– Personal Guaranty Settlements: Without the SBA guaranty in place to absorb much of their losses, the bank will likely look for a larger amount in order to settle the guarantor’s personal obligation.  Without the SBA involvement, the lender does not have to follow SBA procedures for reviewing Offers in Compromise.  They instead get to review any settlement through their own set of criteria.  This criteria for ability to repay will likely result in a higher settlement when compared to a SBA settlement because it will include things such as measuring the amount of wages that could be garnished from the guarantor over their projected remaining working lifespan.

Understanding these pros and cons can better help the business owner set and maintain the correct expectations.  While their personal guaranty settlement may cost them more, the time and the flexibility the bank will offer will often remove the need to conduct a personal guaranty settlement in the first place.  In the event where the personal guaranty is addressed, the lenders still have an incentive to settle over receiving a discharge in bankruptcy, so their calculations are often not so high that settlement is impossible.  They are however, typically more costly than loans that are accompanied with a SBA Guaranty.

To understand if a workout or modification is the right thing for your business, you should first do an assessment of the value of the business assets and the guarantor’s personal assets.  With that in hand, you should seek out professional advice as to whether either alternative is feasible given your circumstances.

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Seller Financing in Workouts

download (1)If you used SBA financing in order to purchase your business in the last 10 years, there is a reasonable likelihood that the SBA required that the seller finance a small portion of the transaction.  This means you did not have to bring that cash or financing to the closing table and instead the previous owner provides the financing and takes a second position note secured behind the SBA note.  The SBA does this to offload some of the risk to the seller.

When a SBA borrower enters into default on their SBA payments, it is assumed that the business is also in default on the payments owed to the previous owner.  In fact, many SBA lenders will require that the previous owner sign a Standby Agreement, which dictates that is the borrower were to go into default on the SBA loan, or if the SBA lender were to modify or forbear payments in any way, that the Seller and previous owner would agree to standby and cease collecting payments until the time the the SBA debt is being paid as agreed again.  These agreements make these seller financed notes high risk and often times put the previous owners in a difficult situation.  These people are traditionally not associated with large lending institutions that have large loan portfolios where writing off a debt is not the end of the world.  Many of these people had debt on their business when they sold it and so therefore did not receive much of the sale proceeds when they sold their business.  Many of them depend on that income and see this portion of the purchase price as their only return on investment for creating and selling the business.  Simply put, these people are not banks and treating them as such is not advised in a workout scenario.

That being said, when the SBA lending banks are taking large discounts to the amount owed to them, the seller financier must understand that it is not appropriate for him or her to be compensated in full, and that is more appropriate that they accept a settlement proportionate to that of the SBA settlement.  If appropriate review of the seller financed note is completed and a high level of communication is maintained with the previous owner, the difficult end result can be met with acceptance instead of resistance.   Having been a business owner, many of these people understand the ups and downs of owning a business.  They further understand what has happened in the economy recently and what affect it has had across all industries.  A workout plan needs to include fully disclosing the financial condition of the business and the guarantor, the goals and objectives to be met with the SBA creditor, and the potential outcomes.  If the previous owner understands these things, they will have little choice but to agree to settle amicably.  Alternatively, if your workout plan does not include a plan for the previous owner, you risk the threat of legal challenges that could greatly delay the workout and settlement process, not to mention add costly attorney fees to the process.

ONE FINAL WORD ON SELLER FINANCING: If the previous owner of your business offered seller financing at closing of the business purchase and is now also your landlord, you should seek professional help before attempting to negotiate a settlement, workout, or reorganization.  A landlord/seller financier has abilities to interrupt business operations a number of ways that other creditors do not.  Couple that with the fact that they will be emotionally involved in your success or failure and it can be a dangerous combination.  While your seller financing and your lease agreement are two separate financial obligations, you must understand that if you are in default on one obligation, that this individual will have a financial incentive to call you under default on the other agreement until all default is cured. Workouts with landlord/seller financiers need to be well planned and executed. If you are in this situation and need help, you should seek professional representation.

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Franchises in Workouts

imagesMany small business owners teamed up with franchises when opening their first business in order to be able to work with an already established brand and to have the training and marketing support necessary to succeed.  However in a down economy, the franchise royalties become like any other financial obligation and cause stress on the cash flow. Despite what other organizations may tell you about the role of franchises in workouts, they do play a very critical role.  Any workout plan that does not address the franchise relationship is likely to fail or be interrupted.  That being said, workouts and settlements can still occur for franchise businesses.  What the business owner and the creditors involved need to understand is that the franchise has a vested interest in controlling the outcome of any territory.  They would preferably like a location to remain open and generating revenue (and therefore royalties) but if a location is to be closed and liquidated by a secured creditor, franchises like to be part of the process so that they can minimize the damage by selling the territory to another franchisee and beginning the process of opening a new location within the territory.

It is really quite simple.  Franchises want as many locations open as possible within their territory that can reflect their brand and their products in a positive way.  By doing so they increase their output and their revenue.  By understanding this and understanding what recourse they have against a franchisee in default, you can create a strategy that includes the franchisor by meeting their needs, along with satisfying both the business owner and creditor as well.

To understand what recourse a franchise may have against a defaulted franchisee, you must examine the franchise agreements and look for the following areas:

1. DISCONTINUANCE OF USE OF MARKS: This section details under what circumstances the franchise can demand that the franchise stop using the trademarks, trade names, and other restricted intellectual property.  By doing this, they essentially render the business useless because the name of the location is a trademark, so being open for business under that trademark would violate the demand to cease and could create additional financial liability

2. TRANSFER FEES AND FRANCHISE FEES: These types of fees are usually large lump sum fees that are required if a franchisee wants to sell one of their franchise locations or if they want to restructure their entity to take in new investment dollars.  These fees are meant to hinder any material change from occurring in ownership of a franchised location without the consent of the franchise.  Ignoring or avoiding these fees could result in a complete termination of the franchise agreement.

3. RIGHT OF FIRST REFUSAL: This section, if present, gives the franchisor the right of first refusal anytime the business owner is interested in selling a location.  That means that the franchise will have a predetermined amount of time to match the purchase price of any potential buyer, and if they do, they are guaranteed the right to purchase the business location.  Rights of first refusal can often times cause other transactions to fail simply due to the amount of time granted in the right of first refusal.

4. TERMS & REMEDIES OF DEFAULT: A franchisee can be in violation of their franchise agreement a number of different ways.  From being in default with certain creditors, to not having the correct signage up, to not meeting other imaging requirements, to being behind on royalty and advertising fees.  This section of a franchise agreement details what rights the franchise has when an operator is in default.  Many franchises include the right to close down the operation and step in themselves to run the operation with their management.  Other secure their obligations with a UCC and have rights to liquidate the company forcefully.  This section of a franchise agreement must be read and understood completely in order to create a workout strategy that does not trigger any events of default.

Once a franchise agreement is read and understood, a workout plan should include the franchise as a stakeholder in the transaction.  By communicating up front the goals you want to achieve and how they align with the goals of the franchisor, you can gain the cooperation and support of the franchise when conducting a workout.  Some will even modify franchise agreements to meet the requirement of the workout.  Attempt to exclude the franchise from the workout process and you take a huge risk that the franchise decides to shut you down.

Before entering into a negotiation with your franchise or your creditor, you should have a professional review your franchise agreement with you.  Reading the entire agreement, and especially focusing on the areas discussed above, will detail exactly how involved your franchise will need to be in your workout process.

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Article 9 UCC Sale

OLYMPUS DIGITAL CAMERAMany business owners do not know what a UCC-1 filing is, never mind understanding what an Article 9 UCC sale is.  However, understanding this type of transaction can help both distressed business owners and investors free their business collateral of liens and encumbrances, which is very important when trying to restructure an organization.

First you must understand what a UCC-1 us and what it’s purpose is.  UCC stands for Uniform Commercial Code, which covers laws and regulations surrounding business and personal property which is pledged as collateral for a loan or other financial instrument.  A UCC-1 is a filing done with the Secretary of State in the state where a business is located. That filing acts much the way a lien does on real property.  The creditor who files their UCC-1 first, is in first position on the business assets described in the UCC.  Any other creditor who files a UCC after that would have a subordinate position on the same assets.  Essentially a UCC filing is a way to lien or encumber any assets that do not have title and cannot be directly liened.  For example, a bank may offer a retail store a line of credit in order to purchase and replenish inventory.  The bank would want to encumber the inventory in case the borrower went into default, so that they would have the rights to liquidate that collateral to pay down the line of credit.  However inventory balances change every day and inventory itself does not have a title that the bank can file a lien on.  Therefore the bank would file a UCC-1 filing and list the inventory as collateral.

What this often results in are several creditors filling UCC-1’s on the same group of collateral.  If a business owner were to experience reduced revenue and want to liquidate assets to either downsize operations or exit the business all together, he or she would have to get approval from each of the creditors who filed a UCC-1 to release the UCC filing.  However, without each creditor being compensated at least to some degree, they will have no incentive to agree to a release.  This becomes a problem when there are several UCC-1 holding creditors but the asset base is currently worth less that what is owed to the first position creditor.  In that case the first position creditor would want to realize all of the proceeds from any sale and would not want anything going to subordinate creditors unless they were being paid in full.  This leaves the business owner, any potential buyer, and the creditors in a stalemate.

However, there is another option – The Article 9 Sale.  Article 9 is part of the Uniform Commercial Code, which varies per state but is relatively similar amongst all states, that gives a UCC creditor the ability to conduct a secured party sale which will remove the security of any UCC-1 filing filed after the creditor in question.  What happens in an Article 9 sale is the UCC-1 creditor acts on the secured position they have and take possession of the assets from the borrowing entity, very similar to what occurs in foreclosure, and then sells the assets to a pre-arranged buyer.  When the secured party takes possession of the assets, any other UCC filing on the borrowing business become no longer relevant and the creditor becomes the seller in a transaction that sells the assets to inquiring buyer.  This allows the business owner to cooperate with the first position lender so that a sale can occur without the interference of subordinate creditors.

This type of transaction requires the assistance of an attorney for the first position creditor and often cases for the guarantor and buyer as well.  Proper notices are sent to all secured creditors, and a notice period must expire before closing occurs in order for the sale to be considered commercially reasonable.  However, if navigated correctly, an Article 9 sale is an excellent way to conduct a sale similar to a friendly foreclosure, that benefits all parties (other than unsecured creditors), but with much less public notice and advertisement, which can negatively affect the reputation of the defaulted guarantor.  These types of sales often preserve the business opportunity, save jobs, and greatly reduce the deficiency balance owed by the defaulted borrower.

To find out more about Article 9 Sales click HERE.  To find out more about how an Article 9 Sale could benefit your business contact us by clicking HERE

The Treasury Offset Program

downloadWhat happens when a SBA borrower and guarantor go into default on a loan and have no plan?  What happens if they ignore the collection calls and notices just hoping they go away, or better yet, assume that the bank will just write off the debt and not come after them?  What happens after the business closes but the guarantor does not complete an offer in compromise nor file bankruptcy?  The answer is that the loan is then entered into the US Treasury Offset Program where collections actions continue indefinitely.

What is different about a SBA loan while it is in the Treasury Offset Program is that the Offer in Compromise program that was once in play with the SBA is no longer there.  The Treasury collects on many types of debt ranging from defaulted tax debts, federally back mortgages, SBA loans, and many more.  They take the same approach to collection regardless of the debt.  This process is much more harsh than that of the SBA.  For example, when calculating a guarantor’s future earning potential, the Treasury measures the amount of wages that could be garnished over the course of that person’s working life expectancy rather than 3-5 years like the SBA does.  This broad approach results in much higher settlement criteria, not to mention a very long settlement process.

Typically the benchmarks for collection with the Treasury Offset Program are to try and collect 50% or more of the outstanding balance.  Keep in mind that after the file is transferred to Treasury, additional fees and interest are applied to the balance which can sometimes increase the balance owed by as much as 20%.  While our office have seen settlements as low as 33% of the outstanding balance, those results are few and far between.  Additionally, the process of settling with Treasury is so lengthy, in certain cases being in excess of 2 years, that many guarantors opt to file bankruptcy just as a means of concluding the issue quickly

The Treasury will also take steps such as offsetting or garnishing tax returns, garnishing social security income, or removing any other sort of financial federal aid.  Seeing as how these funds come from the federal government, they have a right to offset the amount you owe them with these proceeds until the loan is satisfied, a settlement is reached, or a bankruptcy is filed.

All in all a SBA borrower or guarantor in default should take every step necessary to avoid their file from entering the Treasury Offset Program.  While being in Treasury does not eliminate the possibility of a settlement, it will undoubtedly increase the time and costs associated with settling.  Work with the SBA lender to make sure the underlying collateral of the loan is liquidated in a timely manor and then present an Offer in Compromise as soon as they are willing to accept it.  Many defaulted guarantors think they should wait several months, try to increase their net worth in order to put forth a reasonable offer.  While putting forth an offer substantial enough to be considered is important, defaulted borrowers simply do not have the time to let their personal balance sheets to recover.  Put forth the best offer based on your financial condition at the time and preserve your opportunity to work directly with your bank and the SBA to settle.

If you would like to find out more about the US Treasury Offset Program, please click HERE. To learn more about the Offer in Compromise program, please click HERE

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Unsecured Debt Workout

unsecuredSometimes a business’ secured debt is not the problem.  Their secured loans are at reasonable interest rates with reasonable debt service. What causes them pain and distress are their unsecured creditors.  Unsecured creditors come in a variety of forms which include vendors, utilities, lines of credit, or investor notes.  These types of obligations are not secured by any specific piece or group of collateral and often come with higher interest and shorter repayment terms.  For example a debt owed to a vendor/supplier is expected to be paid in full in 30-60 days, sometimes not allowing the business enough time to experience it’s own revenue from the products received from the vendor and in essence inverts the cash flow of the business by making the business owner pay for goods before revenue is realized.  When overall revenue is reduced these situations can quickly get out of hand.  Vendors and suppliers shut the business off from future shipments which can result in the business not being able to operate and provide products to customers. Creditors holding lines of credit shut off any further credit and demand the line paid in full.  Utility companies shut off necessary utilities such as water or power which renders the business useless.  If distressed business owners prioritize their secured debt over their unsecured debt in times of reduced revenue, they run the risk of becoming non-operational.

However an unsecured debt workout can solve these problems for business owners.  Unsecured debt workouts have a variety of results.  It often includes a reorganization of the business to strip the obligations of unsecured debt from the business operation but can take on many forms.  Because of the unsecured nature of these types of obligations and a lack of involvement from a governing body such as the SBA, the debt workout has a wide range of flexibility.  These unsecured debts can be settled for short of whats owed, amortized over long periods of time to meet the needs of the business cash flow, or they can written off without consideration.

Some things to consider when doing a unsecured workout are:

– Will the secured creditors participate in a reorganization if necessary? Reorganization of the business is often part of an unsecured debt workout.  Before entering into negotiations, a business owner should communicate their plan with their secured creditors in order to assure their cooperation in the transaction.  Not doing so could result in default under the secured loans.

– Determine which vendors/creditors are crucial to business operations: Unsecured debt workouts often require multiple approaches working simultaneously with multiple creditors.  A business owner should know which of his vendors or suppliers are crucial to business operation.  These creditors should be prioritized and an agreement should be established before applying any company resources to any other obligations.

– Determine which vendors/creditors are replaceable: Understanding which vendors or suppliers can be replaced easily within the market by a competitor opens many options for a distressed business owner.  Establishing a new vendor relationship with a different vendor before entering into a negotiation with a current vendor/creditor allows the business owner the piece of mind that the creditor will not be able to impact the performance of the company.

– Identify debts secured by a personal guaranty: Just because a debt is not secured by the business assets does not mean it is not secured by a personal guaranty from the business owner.  Identifying which debts are personally guaranteed allows the business owner to calculate his or her personal exposure before entering into a workout and negotiation.

Building a workout plan that includes these four areas of interest will offer a distressed company a complete turnaround plan.  Left alone, high amount of unsecured debt can trigger business cessation or default with the secured creditors.  In order to avoid it, business owners must analyze their situation and create a strategy that will result in debt relief that the business will ultimately require.

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SBA Loan Modification

helpShortly after the economic crash of 2007/2008, the SBA loan default rate peaked and a large amount of SBA borrowers were going to their banks for solutions.  However, as the small business world was not prepared for the economic recession, the SBA and lending banks were not prepared for the fallout that would occur regarding SBA loans.  Because of this, many lenders went into defense-mode by simply liquidating defaulted SBA borrowers, and quickly, in order to protect their SBA guaranty.  Modifications and forbearances became a thing of the past, a myth.  The banks and the SBA quickly became inundated with liquidation requests and offer in compromise proposals, and most gave up on any other alternatives.

However, in recent years we have seen some economic improvement. With this has come an improvement in the SBA loan default rate.  Slowly as the chaos from the recession melted away, lenders began revisiting the idea of loan forbearances and modifications as a way to reduce their default rate and failure rate and as a way to avoid expensive, lengthy, litigious liquidation procedures.  A qualifying business can qualify has several options available that include re amortization, removal of fees in interests, applying past due payments to a balloon payment due at maturity, and periods of complete payment forbearances.

While this is excellent news for the small business community, this process is still very difficult to qualify for.  A qualifying business must meet a very specific set of qualifying circumstances which include:

1. Recovery value of the loan is less than face value: In order for a lender to consider modifying the terms of an SBA note, the recovery value of the loan must be less than the face value of a loan.  In other words, the bank must see a financial incentive in modifying the loan and waiting to get paid over time versus forcefully collecting against the borrower and guarantor.  The recovery value is the forced liquidated value of the business and all guarantors.  If the business and guarantor combined have enough available assets to pay off the loan balance, a lender will likely opt to liquidate over modification.

2. The business must show an ability to repay the note with reasonable interest within 5-7 years: If the bank and SBA are going to modify a loan, the modification goes through a similar process as a loan origination.  The new proposed repayment schedule must be underwritten by the bank and they must believe in the ability of the business to perform on the new agreement.  The ideal financials will show an inability to pay the loans per the original loan agreements but an operational ability to have enough cash flow to service a full repayment within 5-7 years (the typical amount for a re-amortization).  Accurate current financials accompanied by financial projections are instrumental in successfully completing a modification.

3. No history of habitual default: SBA modifications are typically only available to first-time defaulted borrowers.  If the business has a history of default, lenders will likely discredit any proposal for a modification and elect for liquidation instead.

4. No imminent threat of liquidation from other creditors: If a business is threatened to be liquidated or interrupted  by other creditors such as taxing authorities, franchises, landlords, business partners, etc., they will not be willing to modify the terms of an SBA loan.  A bank must be sure that the business operations is not in jeopardy and can therefore honor the new agreement.  They also must be assured that their collateral base for the loan is protected from the actions of other creditors or stake holders.

If these conditions are met a SBA loan modification is possible.  Currently we see these modifications happening most frequently at the larger financial institutions and banks.  However, this process has been trickling down and is now beginning  at the local bank level as well.  Modifications are a great alternative for the right borrowers and guarantors. If done correctly, they removes the conditions of default, gives the business the cash flow relieve it needs, and assures the bank does not lose it’s SBA guaranty, while being paid in full.

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SBA Debt Workout

What is an SBA debt workout and who qualifies for one?maze

An SBA workout is like any other debt workout.  The goal of the workout is to remove as much of the burden of the debt load and debt service as possible from both the business and the guarantor while preserving the business opportunity (when possible).  Workouts take many forms and there is no cookie-cutter way to effectively conduct a workout.  Workouts do require a level of risk and there are many things that need to be considered before entering into a workout.  Some circumstances worth considering are:

– Liquidated value of business assets: What are the business asset worth and how much of the debt would be covered by liquidating them for the benefit of the SBA creditor?
– Current and projected business performance:  How much cash flow can the business afford to service debt with?  Can the owner afford any more cuts?  Is revenue climbing or falling?  Do projections show improvement in the short-term? Is loan modification possible given the financial capability of the business?
– Current industry trends: Is the industry expanding or is the market constricting?  Are their external forces affecting business operations?
– Size of the SBA obligation: Is the loan so large and under collateralized that it scares away most potential buyers or investors?  Is the loan so small that the debtor will be left personally responsibly for all shortfall liability?
– Personal net worth of guarantors: Does the guarantors show a large amount of equity in their home?  Do they have other liquid and unprotected assets?
Additional collateral for SBA loan: Did the guarantors pledge additional collateral for the loan?  Is there a lien on real property?  Is there cross-collateralization with another operating business?

Understanding these points of interest will help a defaulted borrower calculate the true costs of a SBA secured debt workout.  The results from a successful debt workout are pretty incredible.  Guarantors settle their outstanding obligations, businesses survive and are in some cases restructured in order to preserve jobs and opportunity, and the banks satisfy their SBA obligations and receive their SBA guaranty.  However, workouts have costs and some businesses are not financially strong enough to support the requirements of a workout.  A full assessment and valuation of all relevant business factors should be done before any small business owner enters into a workout with a SBA lending bank.

Because the bank has its SBA guaranty to protect, lenders do not often have the same level of flexibility when it comes to modifying or altering SBA loans.  Therefore they follow a strict path of liquidation which is regulated by the SBA Standard Operating Procedures for loans in default.  This path traditionally means litigation, foreclosure, and auction of the business followed by a pursuit of the guarantor to collect the deficiency.  Workouts offer alternatives to both lenders and debtors that meet all of the SBA requirements but do not require litigation, foreclosure, or bankruptcy.  Understanding how to satisfy the SBA requirements is what’s key to success.

Overall a SBA debt workout is a business strategy that is meant to preserve the business opportunity while removing debt from both the business operation and the guarantors.  Defaulted SBA borrowers who do not qualify for loan modification are candidates for a workout.  However the costs associated with a workout vastly vary based on the circumstances surrounding each loan, each business and each guarantor.

 

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