Despite everyone’s best intentions, sometimes a business loan default will occur. When the fault occurs on an SBA loan or a commercial loan, it is in the borrower’s best interests to work closely with the lender to agree upon a workout strategy, otherwise the borrower may face debt collection and, ultimately, asset liquidation. It is only through a systematic approach to devising the most appropriate workout plan that the borrower can ensure that defaults do not continue to occur, and that the relationship can ultimately return to its pre-default status.
To begin the process of agreeing upon a workout strategy, the lender and borrower should both agree to authorizing a comprehensive and thorough business analysis; consulting with attorneys and CPAs; and arranging for a certified appraisal and valuation of the business.
Identifying the Source of the Problems
When a business defaults on a loan, the business directors usually have an idea as to the reasons behind the default. Interestingly, when a business commits to comprehensive and objective analysis, it is not uncommon to find that what were thought to be the business’s challenges were incorrectly identified, or were only a symptom of a much larger problem.
For this reason, it is imperative that a comprehensive business analysis is entered into. A properly performed business analysis will examine all of the quantitative and qualitative factors related to the business’s unique situation, identify specific concerns and challenges related to the business, and quantify the effects of these concerns and challenges to the business’s bottom line.
An effective business analysis should provide answers to the following queries:
Roles within the Organization: Does everyone within the business structure, from the owner through all levels of employees, understand their unique role in ensuring the ongoing success of the business?
Cash Flow Management Systems: Are current assets maximized to their full extent? Are there different systems that could be put in place to ensure that receivables and payables are properly forecast and managed?
Breakeven Analysis and Tracking: Have breakeven points been identified for the various departments within the business, and are the correct analytics in place to track the impact of increased costs on the business?
Measuring and Benchmarking Costs: Have predetermined cost standards been assigned for the business, and are costs benchmarked and measured against these standards? Are effective control systems in place to achieve this?
Business Ratios: Have effective business ratios been put in place to identify business trends and to measure business performance as a whole?
Marketing ROI: Have promotional and advertising investments brought in a reasonable return? Have all costs of marketing and sales been effectively budgeted?
Costs of Labor: Is employee turnover problem, and if so, as the cost impact be measured? Have employee remunerations and rewards been budgeted effectively?
Merchandise and Inventory: Are inventory levels at an appropriate rate to ensure the lowest possible cost of goods and maximum turnover rates?
Comprehensive and objective answers to the above queries will identify the short-, medium-, and long-term effects that any challenges will have on the business’s bottom line.