Face The Facts
What to do when you're in a cash crunch and can't make payments on a bank loan
By George M. Dawson
Q: We're in our second
year of a loan for our camera shop, and we're now having
trouble making payments. How should we deal with our bank?
A: Focus on why your cash
flow is down from last year. Create a plan to correct the problem;
detailed cash-flow projections will buy time. Develop a strong case
explaining that immediate repayment will mean losses for the
bank.
Fight the urge to hide-it's better to take the initiative
and contact the bank. Your best outcome is a loan you can handle.
The bank's best outcome is to collect more in the future rather
than liquidate your loan right now.
Content Continues Below
You'll want to meet with your attorney to review your
options, including bankruptcy. Don't bring your attorney to
initial meetings with the bank-that's an invitation to
fight-but never sign anything before your attorney has reviewed it.
Get copies of everything. Don't tell the bank you're
considering bankruptcy, or they'll see red.
The banker won't help you design your business turnaround.
He or she will hold back, respond to your ideas and ask lots of
questions. Remember: Nothing makes the bank shut down faster than a
loss of confidence in the borrower. Be open and honest; giving
inaccurate financial statements is fraud, and it'll cost you
protection under bankruptcy laws.
The bank's approach depends on how the loan officer sees the
situation. Is the problem your lack of management ability, problems
impacting your entire industry or better-than-expected growth? Do
you have a good plan, or are you blindly hoping for a lucky
development?
The bank could lower the interest rate, extend the time to pay
or even lend you more money. In return for loan restructuring,
expect to sign an agreement allowing the peaceful enforcement of
collateral agreements, should your turnaround fail. Be certain you
can keep these promises and live with the results.
George M. Dawson (gdawson@txdirect.net) is a
business consultant and author of Borrowing to Build Your
Business: Getting Your Banker to Say "Yes" (Upstart
Publishing, $16.95, 800-235-8866). Send him your financing
questions at bsumag@entrepreneur.com.