Guest post by Dale Gunther, Vice Chairman of the Board, People’s Utah Bancorp
The economy continues to improve, but many businesses are still struggling—some to the point of being unable to repay a loan.
If you are experiencing or may potentially experience loan default by missing regular payments, there are three critical steps you should take:
Talk to your lender. The worst thing you can do is keep your lender in the dark. Inform him or her of your situation and see if you can negotiate the terms of your loan contract. Some loan terms up for discussion could include changing the terms of payment (such as paying less per month but for a longer period of time with a higher interest rate), late-payment forgiveness with a promise that future payments will be on time, or refinancing at a lower interest rate.
Make a plan. A key factor in helping your lender determine his or her willingness to work with you is a recovery plan that should be generated by you. This written plan should include a situational analysis of the current state of your business, as well as an outline for how you plan to improve operations in order to come current on any outstanding loan payments. This proves to your lender that you are serious about holding up your end of the bargain. It also gives the lender something tangible to provide to loan committee in order to advocate for you.
Cut costs. One of the most common elements of a recovery plan includes detailing how you will cut costs. Is it time to move to a smaller office, liquidate inventory or restructure? Reducing expenses is never easy, but is necessary to increase cash flow that can be redirected toward debt repayment.
It’s important to remember that a lender expects troubled borrowers to show integrity and make every effort to repay their loan. When I was a young man early in my business career, my father told me the story of a building contractor and two partners that had a powerful impact on my life. When the business failed, the two partners declared bankruptcy and left the area. The remaining partner was left to face his creditors alone. He ended up developing a small business selling a product to contractors. When my father visited with him about 30 years later, the 90-year-old man said, “I am a free man. I just paid off the last of my debts.”
Working hard to repay a loan despite financial difficulties is not only admirable but can save you trouble down the road. Some of the problems you may run into if you default on a loan include:
Drop in credit score. Each missed payment negatively impacts your business credit score. Your personal credit score may also be affected, depending on the type of business structure you have in place.
Increased interest rates. Your business interest rates (and possibly your personal interest rates) on existing loans may increase if your credit score dips. This could potentially affect your current loan agreement and will definitely affect any future loans.
Foreclosure or seizure of collateral. Loan default allows the lender to seize any property or collateral included in your loan contract in an effort to recuperate losses. In fact, lenders don’t even have to wait until you default; they can begin the seizure process as soon as a loan covenant is broken. Loan covenants may include a variety of obligations, including a business owner’s agreement to meet certain profit goals or to not incur additional debt.
There are many reasons a business owner defaults on a loan, but only one good way to deal with the situation: talk to your lender, and do it now. The worst thing you can do is run away from the situation and keep your lender out of the know. Banks don’t want to foreclose on your property or get rid of your inventory, and are often willing to employ creative problem solving to avoid loan defaults.
Dale Gunther is vice chairman of the board of People’s Utah Bancorp, the holding company for Bank of American Fork , which is an Equal Housing Lender and Member FDIC. At the start of his 16-year tenure as CEO at Bank of American Fork, the bank had two branches and $80 million in assets; it now has 13 offices and more than $880 million in assets. Dale has served as chairman of the Utah Bankers Association and currently serves as an American Fork city councilman. This article should not be considered legal or investment advice. Seek legal and investment advice from your own qualified professional.