"Rescheduling" a Bank Loan
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How to Be Your Own CFO: Six Step Turnaround Plan for Retailers
Having problems meeting your bank loan? You’re not alone. Even the superstars of business seem to be having troubles these days. And they have enough assets to make your head spin.
Bailouts are not new—banks have always dealt with business turnarounds. Most banks have a specific department for the restructuring of business loans. They call this the "workout situation".
We asked our local veteran banker who processes commercial loans what usually occurs when a business gets behind in its loan payments. Our banker took a straightforward approach, saying, “I usually catch a delinquent loan no later than 30 days, though I like to discover them in 20 days.”
Our banker noted that a problem can be identified quickly once the owner of the business focuses attention on the matter. However, some owners refuse to recognize a problem for a number of reasons:
This is the most important element to any business turnaround: recognizing that there is a problem. Falling behind in payments on your loan should be a clear indication. Don’t wait for the bank to call you.
Follow this six-step turnaround process for your retail business. The key: keep you in charge of your own future! The restructuring of any loan involves the following six essential steps.
1 Admit the Problem
This is undoubtedly the toughest step. Start by reviewing all aspects of your business. Why aren’t you making those loan payments? In your investigation, try to pinpoint exactly what the problem is so that you can address it squarely.
Even if you aren’t certain, don’t feel embarrassed to call your banker. And don't wait until you think you have the solution. "Lead time" is essential to manage!
2 Call Your Banker
Perhaps you are not down to the wire on your loan, but you foresee the potential for trouble. Don’t hope your banker won’t notice your tardiness. Bankers do notice.
Face the situation by first facing your banker. Your banker can help.
Begin by making an appointment to work out a payment-rescheduling plan. When you tell your banker your troubles, don’t expect him or her to be shocked. Anyone who has been in the lending business longer than a month has most likely encountered businesses with repayment problems. Don’t be afraid to explain where you stand and to propose that you work out the problems together.
3 Provide Up to Date Financial Statements
Before you propose a rescheduling agreement, however, put your financial documents in order. Before the banker can place any confidence in your ability to operate your business or follow a plan, you must demonstrate your ability to track your past performance.
When you submit the rescheduling proposal, your banker will want the same kind of financial information you provided for the initial loan. The bank will assess your prospects to accomplish a turnaround within a reasonable amount of time. To make that assessment, your banker analyzes:
Our banker friend pointed out that he could quickly locate a problem by looking at three areas of the income statement: sales, gross margin and net income (or loss).
The balance sheet, on the other hand, shows your company’s financial condition at a particular point in time. It lists what your company owns (assets) and what it owes (liabilities). The difference between assets and liabilities is the net worth, or equity, of your company. This is simply the money in the business that is not owed to anyone, representing the owner’s interest.
4 Prepare Financial Projections
Because the income statement and balance sheet reflect your business’ history, you also will need to present your financial plans for the future.
Your banker will want to see pro forma (projected) income statements for the next 12 months. By using up-to-date information from your financial statement, you should be able to develop defensible projections. Remember, you must be able to substantiate your forecasts of sales, expenses and profit.
Your cash flow budget is vital because it shows the banker how you plan to handle your cash and whether or not another loan is necessary to cover future costs. Let your banker know your planned adjustments if your store’s performance falls short of projections.
5 Show You Are In Control
Your strategy for controlling expenses will probably be the most important thing that you present to your banker. But you will also have to show that you have reviewed all aspects of your business relating to the flow of cash or other obligations.
6 Develop A Plan – and Stick To It!
Once you have gotten this far, it’s easy to develop a plan. By following these steps, a plan will emerge allowing you to restructure your loan if needed.
We hope you never need to reschedule a loan. But if you ever find yourself in financial trouble, or even just a bit off-course, it’s good to know your banker is on your side. Let him or her help you do more than just survive a difficult time. Together you can get your business back on track. Keep in mind that your banker has no use for your business.
Our banker friend says, “We’d much rather have a successful customer.” And he adds, “We make money when our customers do.”