What to do if your bank turn down your request to renegotiate your loan ?
One of the biggest intellectual jumps most of my small-business clients need to make is understanding that loans aren't etched in stone. When they realize the terms of loans can, and often should, be renegotiated, and that the hurdles associated with renegotiation are surmountable, a whole new world of business opportunity is revealed. I tell people to renegotiate business loans in four circumstances:
1. they didn't borrow as much as needed to achieve their goals;
2. interest rates have fallen and they're stuck with a high interest loan;
3. they've discovered they can't continue to pay the loan back as scheduled; or
4. they're about to violate some condition of the loan.
The first three scenarios are straightforward, but the fourth requires some explanation. Bankers like to make loans and then forget about them. To do that, they need to take extra precautions when making business loans of longer than one year. To protect themselves, especially when making unsecured loans, they require assurances that your business will remain in as good a fiscal condition or better than it was at the time they made the loan. To obtain those guarantees they write affirmative and negative covenants into loan agreements.
An affirmative covenant is a promise that you will do something, while a negative covenant is a promise that you won't do something. For instance, an affirmative covenant would be that you agree to maintain an assets-to-liability ratio of two to one, and a negative covenant would be that you promise not to borrow from anyone else without the lender's prior consent.
According to the terms of most loan agreements, when one of these covenants is broken, the entire loan can automatically come due, depending on the significance of the event. If, whether by design or default, your business may be violating one of the covenants of your loan agreement, you need to renegotiate the loan before the event, in order to forestall having to pay off the entire loan balance immediately.
In fact, as soon as you detect any sign of potential trouble with your loan, you should get in touch with your banker. You will not be able to keep your trouble secret from your banker. He will learn about it, one way or another. You'll have a far better chance of renegotiating if you bring the matter to his attention and present him with a plan, than if you wait for it to become obvious.
Ironically, you have the most leverage with a banker when you are in, or soon will be in, some kind of financial trouble. A banker doesn't want to write off a loan and will do almost anything to keep from doing so. Note that I said almost anything, not anything. A banker will be surprisingly flexible as long as he sees you have a chance to survive. However, he'll cut you off the moment he believes your business has no chance to make it.
You have the least leverage with a banker when you want to renegotiate simply in order to improve your bottom line; let's say you want to take advantage of dropped interest rates. The way to increase your leverage in those situations is to suggest you may consider taking your banking business elsewhere. To get a banker to renegotiate your loan down to a lower rate you'll need to have another bank's offer of a loan at that rate in your pocket.
They've turned down my request to renegotiate my loan.
Remember, they've made a business decision based on the facts submitted. This isn't a personal rejection of you. In order to turn this into a rational problem you need to be more specific and determine why they have turned you down.
Obviously, it's vital you know your own business inside out. It's almost as important to become an expert on the banker's needs and wants. But the single most important piece of information is the reason for your rejection. Thankfully, every institutional lender, by law, must provide you with the reason for a rejection.
It's important to always maintain a trusting relationship with your banker. It's doubly important if you're coming to him to admit that you're in trouble and need his help to survive. The banker will be looking closely at you as well as your numbers to insure you really do have a chance to pull out of your death spiral. That means you must project enthusiasm and excitement about the future, despite the current difficulty. You must also have a plan that makes sense. Even though you've been rejected you need to keep a positive outlook. The future of your business is bright. All you need is to get through the current rain squall until you reach the rainbow. You need the banker to see that light at the end of the tunnel as clearly as you do.
A banker generally will reject a request to renegotiate for one of three reasons: he doesn't have the authority to renegotiate; he no longer has confidence in your numbers; or he no longer has confidence in your ability to run the business.
If the banker says he doesn't have the authority to renegotiate, what he's really saying is he doesn't want to bring the matter to his boss and be forced to admit he made a mistake. Instead, he's trying to intimidate you into sticking to your original agreement. In this case, apologize to the banker. Say that you know you've put him in a tight spot and that you've let him down.
Explain that you'll understand if he doesn't want to be your advocate, but that you at least need him to introduce you to his superior so you can present your own case. You're giving the banker a choice to either have control of the presentation to his superior or to leave it to you. Odds are he'll choose to become your advocate, if for no other reason than to protect himself.
When a banker no longer has confidence in your numbers, you need to provide him with somewhere else to place his confidence. Ask for a reconsideration based on a new proposal, this one including additional collateral and either your own personal guarantee or a third-party guarantee. As soon as the discussion shifts to the size of the collateral and the nature of the guarantees you will have succeeded in turning the no around.
A banker who no longer has confidence in you must be presented with someone else on whom he can rely. In order to turn this no around you'll need to bring in another person. It could be a new financial officer you've just hired, a general manager, a new experienced partner, or maybe even a business consultant. Whoever it is, she will need to generate sufficient trust in the banker to compensate for your failings. The more trust she generates, the easier it will be to turn the no around.
tags: bank, loan
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