When You're in Bad with the Bank

If you have missed payments on your bank loan or are in violation of covenants, your bank may want to sell off the loan. Here's what you can do to prepare yourself

Know your loan agreement

If you think you're about to be in violation of your loan contract, review it with an attorney so you know exactly what penalties you could be slapped with.

Come up with a plan

You need a strategy to return your company to good standing with the bank. That could mean selling assets or ancillary businesses, cutting expenses, or changing your market focus. Present your plan to your banker and try to cut a deal—known as a forbearance agreement—that can temporarily allow lower payments. Get it in writing. If your loan is sold, the new creditor will be obligated to honor that deal.

If the loan is sold, do your homework

Find out as much as you can about your new creditor. Try to find other companies that have had their debt bought by your new loan holder, and ask them about their experience. If you hear that the buyer is quick to foreclose, look for a way to refinance as fast as possible.

Be proactive

Ask for a meeting with the new creditor, then give a presentation on how you will turn your business around. "You need to demonstrate to the lender that letting you live for another

day benefits them," says Joseph Luzinski, senior vice-president in the Miami office of turnaround firm Development Specialists.

Don't hide the truth

For example, if you had not finalized a forbearance agreement with your old bank, don't try to convince the new creditor you did. Says James Hrebenar, director and chief operating officer at Houston-based NC Ventures: "Once we know we are being lied to, we become a lot more difficult."