What To Do If Your Bank Wants Out Of The Commercial Loan They Have With You

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Brad Hettich on Real Estate Revealed – Sunday, November 15, 2020

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Sunday, November 15, 2020

 

Good Morning.  It is a bit brisk out there this morning.  It appears our Indian Summer is finally over.

I usually like to keep everything positive.  There are always plenty of opportunities to get commercial financing done, and you would be surprised what we can done, even for people in tough situations.

However, this morning I want to talk about a bit of a rougher topic.  And that is What to Do if your Bank wants out of the Commercial Loan they have with you.

To date all of the regulatory agencies have provided Banks and Credit Unions substantial flexibility to work with clients negatively impacted by Covid-19.  But as time goes on the regulators’ flexibility is going to decrease and Banks themselves are going to be less patient, and we expect to see this become more prevalent in the next six months.

Before going into what you can do, let’s talk about some warning signs that your Bank may not want your business anymore.  Often times these signs are subtle.  But sometimes your Banker is going to be blunt with you about it as well.

  • Lender’s start requiring updated financials and start tightly monitoring your financial performance.
  • The Bank starts requesting information they have never requested before. This could be more detailed financial information, verification of deposit accounts or marketable securities, etc.
  • The Bank requests additional collateral on your loan or an additional guarantor or other credit enhancement.
  • Your Banker starts asking you what other options you might have to pay down debt or pay them off.
  • The Bank freezes availability on your line of credit or ceases to provide you flexibility with your other accounts.
  • Most obvious one, they refuse to renew your loan or ask you to leave.

Often it feels like the Bank is holding all of the cards and you do not have a lot of options.  Although there is some truth to that, I want you to know that you do have options.  Here are some things we recommend:

  • Communicate openly with the Bank and provide them as much of what they ask for as you reasonably can. Your willingness to work with the Bank often times will give you leniency and sometimes flexibility in working something out with the Bank.
  • If they request additional collateral, be cautious and be sure you are getting something in return for providing it. We had a client that was asked to put up another property that they own for a three-month renewal, which they did, but when the loan matured three months later the Bank refused to renew it and then filed foreclosure on both the existing property and the new property pledged as collateral.  So be sure if you are putting additional assets at risk you are getting enough time or new money to get you to the other side of the situation you are in.
  • If your loan is secured by real estate and the Bank asks for a deed in lieu of foreclosure, which is in essence you are putting a deed to your property in escrow with the Bank, be very cautious. This will allow the Bank to move forward and take possession of your property without having to go through foreclosure if you default on your loan.  At that point the only option you might have is bankruptcy.   We had a client sign a renewal in exchange for putting a deed in escrow with the Bank, and six months later when that renewal expired the Bank immediately went to court to take possession of their property.  At that point they were forced to file bankruptcy to save their property.  So be sure you are protected if you are doing this and have consulted your attorney and the decision to put up the deed makes sense for your situation.
  • Request outside help and be sure you are consulting with your attorney and accountant. If your attorney does not have experience dealing with Bank’s, ask them for a referral to an attorney who does.  Knowing the law around loan documents, foreclosure, and having experience dealing with Banks can often times be key to getting a deal worked out.
  • Try to avoid filing bankruptcy unless it is your last recourse. Often times bankruptcy, whether personal or corporate, will really limit the flexibility you have to get financing going forward.
  • If you are looking to settle with the Bank, be willing to give the Bank something to entice a settlement. If the Bank will not be made whole by liquidating the collateral, often they are going to require something from the owner / Guarantor to settle the debt.  Find something you can provide them to entice that settlement.
  • Lastly, seek alternative financing. Just because your Bank is not comfortable it does not mean you won’t qualify with another Bank under a different structure.  Also, there are plenty of alternative lending solutions out there as well.  We had a client come to us a couple of months ago because the Bank refused to renew their real estate loan and they were struggling to find another lender to do it.  We were able to restructure the debt and cross in another property and get them fresh financing with another traditional bank and just closed this past week, despite their existing Bank having filed foreclosure on them.  There are ways to get creative with both traditional banks as well as other non-bank lenders and private money lenders that can be used even in tougher situations.

If you run into a situation where you do not know what to do, please keep us in mind as a resource.  We have over 350 different funding partners we work with, both traditional and non-traditional, and we understand credit and how to restructure loans to get them done.   You can always reach me at 630-988-4852 or via email at brad@commerciallendingx.com. Thank you!