Editor’s note: Many businesses have been significantly impacted by the pandemic. And while, fortunately, many have been able to take advantage of loan deferrals and government assistance programs, businesses in the most hard-hit industries may still find themselves unable to meet all of their obligations in the months ahead. For some helpful perspective, we turned to CEDF’s Director of Managed Assets, Jay Babcock.
Q: No borrower likes to be in a situation where they find they can’t make their loan payment. Why is it important to communicate regularly and candidly with a lender?
A: It is always a good idea to stay in close touch with your lender and with all your business advisers, especially in “unprecedented times” like COVID has brought. Lenders, particularly CEDF and its Business Advisors, are in touch with many other businesses with similar challenges as you may be facing and they may be aware of how others have faced those challenges. Lenders can generally be a good source of information and supporter. Your lender wants you to succeed and to be of help, and in that way they need to know what is going on in your business.
Q: Is it important to be proactive and make contact before the due date of the payment that might be late?
A: Following in the theme of keeping your lender informed or “in the loop,” it is a good idea to give him or her a heads-up when a situation such as an anticipated late payment arises. Bankers or non-bank lenders do not like surprises. Furthermore, there is likely something we can do to work with you on a situation that, should it worsen and become a trend, would be more difficult to address. Telling your lender that you may be late on a payment is not an “event of default” and may, in fact, give everyone an opportunity to prevent or hold-off an actual default.
Q: If a lender becomes aware that you are having a hard time financially, won’t they call your loan, freeze your line or send the loan to a collection agency?
A: Different lenders have different responses to bad news. And, keep in mind – this is important – that the documents you signed at the time you received the loan direct or define how the borrower and the lender are to act and what can be done. Loan documents are really promises made with specific courses of action that all parties can take if the promises are broken. So, to answer the question, you typically have to be in default (or have broken a promise) for a lender to take actions like the above examples.
Q: What about financial statements? What if you are behind on bookkeeping? Won’t the lender be asking for financial reports?
A: Keeping good, accurate, and up to date financial statements should be something every business practices, and not just because the banker or lender asks for them (or “bugs me” for them). Often, small business operators are expert at what they make, serve, or sell, and not so good at some of the administrative activities. So, if you are not able to keep up with the bookkeeping, it is time – or past time – to engage an expert.
The other avenue is to find a bookkeeping software that will make record keeping simpler. CEDF can recommend appropriate vendors (financial service providers, software, payroll, etc.) and, periodically we offer training on how to use software like QuickBooks and incorporate it into your routine. You should look at your recordkeeping as a way to measure your success and identify stresses. Use it as a planning tool to avoid slips.
Q: What if someone is just not sure they should continue to operate their business? What’s going to happen to their loan?
A: Just because your business ceases operation, your obligation to repay your loan does not go away. There are certain times in the life of a business that hiring an attorney may be particularly wise. Closing a business is one of these times. Should you decide you don’t want to continue operating, you should attempt to place a value on the business and see if someone would like to buy it. Though this is difficult and will not necessarily extinguish the debt, it is a consideration. Another course of action is to liquidate the business assets with the involvement of your lender.
Another thing to keep in mind is nearly all small business lenders have the individual owner of the business personally guarantee the repayment of the note. This is reasonable for lenders to ask as there is often little separation between a small business and its owner. To add another layer, many loans will be secured or collateralized with a lien on the business owner’s home (real estate), if available.
So with CEDF, what can happen is we will consider restructuring your loan to make it more affordable and easier for you to pay while you adjust your financial situation (new job, sell other assets, etc.). In today’s COVID world, your pivot to a new position with a new business or new job is not something to be ashamed of, but perhaps the most reasonable reaction to adversity. Just be communicative throughout the process. You will receive as much cooperation from your lender as you offer.