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Tip of the Week
Workout or Liquidate?
Recently the question has come up more frequently, "When should we attempt a workout and when should we initiate liquidation?" with respect to SBA 7(a) loans. The answer lies somewhere between art and science.
One key factor to keep in mind is the "prudent lending standards (or practice)" that has become a cornerstone in SBA's review and evaluation of lender actions. Along with this is the expectation that lenders will service and liquidate their SBA guaranteed loans no less diligently than they would loans that are not guaranteed by the SBA. Simply put, the SBA guaranty is not a substitute for sound lending and collection practices.
When to consider a workout:
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Is the borrower/principal cooperative and communicative? - This is a prerequisite to working toward a turnaround. If the principal is forthright, honest and acknowledges that something is broken and is willing to take the necessary steps to fix it, a workout may be possible. On the other hand, a workout is not likely to bring about a positive outcome if:
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the principal blames everything and everyone else for the problems,
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they have a Pollyannaish outlook, or
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they are not honestly and fully disclosing to the lender, themselves and other stakeholders.
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Is the borrower/principal competent to turn the situation around? - Competency includes technical factors and management factors. Just because the principal is good at making widgets does not mean he/she understands the financial elements of making widgets profitably. If the principal is deficient in either area, are they willing to seek outside assistance? SCORE is a great resource, especially for small business owners who may be weak in marketing, management and financial matters.
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Is the business (product or service) still viable? This question encompasses many facets but the lender (and borrower) must evaluate whether the business can indeed be revived given the supply and demand factors, location, economy, etc. How many gas stations on old Route 66 closed up when the interstate highway systems passed them by? People still needed gas, just not where the old vendors were located.
There are certainly other things to consider in evaluating whether a turn-around (workout) can succeed. But, at least these three areas have to line up affirmatively. If a workout seems feasible, it may be advisable to put some of the key components in writing, perhaps in the form of a forbearance agreement. Also, this is a prime opportunity to review the loan file and documents and correct any deficiencies - before the lender commits to specific forbearing actions or time frames.
When to initiate liquidation:
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Particularly if the borrower/principal is not communicative and cooperative, the lender is left with few options other than to take a "hard-nosed" approach. Sometimes sending a DEMAND letter will get the principal's attention, or that of other stakeholders, so that they will "come to the table".
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The borrower has abandoned the business. Sometimes the principal just disappears. Or they "send in the keys" (or leave them with an attorney or someone else).
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The loan goes into payment default and there are no realistic prospects to rehabilitate the borrower.
If liquidation appears to be the path to follow, our primary advice is do not procrastinate. Once a lender determines that liquidation is necessary, they must take timely action to protect collateral. There is increased risk of personal property assets being depreciated through lack of maintenance and care or dissipated (hidden or sold to pay other expenses such as payroll, COD vendors, etc.). If real property is vacated, the risk of damage from weather or vandalism increases.
The lender must make (or commission) a timely site visit with the primary objective of accounting for the presence, condition and value of collateral. Photographs or video are useful in documenting collateral. It may be necessary to take some form of action to protect (fencing, security patrol, etc.) or even repossess movable collateral to avoid loss of control and value that could lead to a repair (repair = reduction in SBA guaranty payment amount).
Be sure to check the current version of the Matrix for Servicing and Liquidation Actions to verify which actions are delegated, which ones require notification of SBA and which actions require prior approval of SBA (including approval of Liquidation Plans for loans approved under CLP; and approval of Litigation Plans and Budgets for non-routine litigation or routine litigation expenses exceeding $10,000). And, do not forget that the SBA guaranty expires 180 days after the stated maturity of the NOTE. Even if a loan is in liquidation, if a workout will require going beyond the stated maturity date, be sure to notify SBA in writing that the maturity date is being extended.
Workout or Liquidation can be turbulent. We at sbaAccess can help you navigate these rough waters. Contact us by e-mail, phone of at www.sbaAccess.com for a Lifeline relationship.
Take the Right Approach
John Cumbey, Karen McHugh and Brian Burke
SBA Access ©2009 - All Rights Reserved
All content is copyrighted and unauthorized use is strictly prohibited. If you would like to quote any part of this text, email bburke@sbaaccess.com or kmchugh@sbaaccess.com for permission.
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