We’ve been covering questions about deferrals in several recent articles. And our clients continue seeing a rise in Borrowers’ requests for payment assistance.
So we’re here today to remind you that, while deferrals are one option, they’re not the only option – and they’re not always the best option.
In SOP 50 57 3, SBA says, “Whenever feasible, Lenders must make a good faith effort to negotiate a workout on an SBA Loan that is seriously delinquent or in liquidation.”
We agree – but why wait for seriously delinquent or liquidation?
If a Borrower comes to you with a problem before they’ve reached serious delinquency, it’s on you, the Lender, to review whether the problem is a short-term problem – or a long-term problem. And if it’s a long-term problem, even if not yet seriously delinquent or facing liquidation, then moving quickly to a workout could prevent foreclosure or bankruptcy, and potentially keep the business operational. This benefits all parties involved.
There are six key things to remember when determining the best course of action.
Current financials allow accurate and up-to-date analysis. Interim financials, debt schedules, and aging reports all build that picture. Current business and personal credit reports, UCC searches, property taxes (if applicable), and legal searches can all help you understand where things are and what external factors are impacting your Borrower.
At minimum, obtain the most recent two years’ returns from the Borrower and affiliates. If the returns are on extension, collect the extension and an explanation why it’s not yet filed.
Personal financial statements and tax returns from personal guarantors help develop the picture of how the Borrower impacts the principal’s cash flow, and vice versa.
A Site Visit is also helpful in understanding the situation.
Remember the SOP’s point about feasibility. (Feasibility is “the likelihood, possibility, or capability of something being done or accomplished.”) Based on your analysis, is it feasible that a workout or modification of loan terms could lead to the full repayment of the loan within SBA SOP requirements?
And remember: the sooner you talk about workouts with your Borrower, the better. Uncertainty tends to create inertia. It’s daunting to think about, especially for a Borrower in distress, but that makes it all the more important to gather documents and data quickly. Analyze the options, and then both you and the Borrower will know what can be done.
Remember, too, that not all modifications can be done under Lender’s unilateral authority. Be aware of what you’re allowed to do and whose approval is needed. Loans sold on the Secondary Market may have more limitations – but that shouldn’t stop you. If the Secondary Market won’t approve the modification the Lender presents, the loan can be repurchased and the modification completed.
No one wants a Borrower to fail. No Lender wants to own real estate through foreclosure, or to liquidate assets. It’s time consuming, not cost effective, and doesn’t always result in full recovery. It’s in everyone’s best interest to look at the options available, perform the appropriate analysis of the situation, and choose the option that will result in the best outcome for everyone involved.
This is a complex issue – and we can only cover so much in an article. If you have questions, especially if you have loans you suspect may be heading into troubled waters, give us a call at 877.576.0819, or contact us here. We look forward to helping you reach the best resolution possible.