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SMART ANSWERS
By Karen E. Klein
MAY 25, 2000


Renegotiating a Loan, from a Weak Position

The trick is to convince your lender that your business is worth more alive than dead

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Q:  I bought a bowling alley a year ago with about $450,000 in financing. I lost $100,000 but have restructured the business, and think I can succeed with a turnaround. How do I go about renegotiating my loans?

-- L.C., St. Louis

A:  Before you think about the loans, have you gone so far as to change your business entity? If as part of your turnaround, you plan to transform your business structure (say, by changing your corporate name, creating a partnership, or becoming a limited liability company), you will need to check your loan documents and determine whether they give you the freedom to do so. Most loan documents include language prohibiting such a change, experts say, and you will need to put together a business plan, go to your lenders, and obtain consent by convincing them that the restructuring will be successful.

If you have simply revamped your business practices, and you are using the same entity under which you signed the loan documents, your task will be to work out a debt restructuring that will allow your company the time and cash flow to achieve the turnaround. You will still need to write up a new business plan, with input from your accountant and any consultants that you are using to help get your company back on track. Take it to your lenders with a specific program for changing the loan terms so that they fit your new cash-flow projections. With luck, you can then save the business and not face bankruptcy and foreclosure.

"Be realistic, and don't ask for things that you know they won't agree to," says A. Barry Cappello, an attorney specializing in borrowers' rights and lender-liability litigation with the Santa Barbara (Calif.) law firm of Cappello & McCann. "You might ask for some skips in payments, a reduction of the interest rate you're paying, and/or the ability to just pay interest for a while and have them carry the principal," he suggests. "If you're articulate enough, you can negotiate with your lenders personally. If you don't feel articulate enough, you should have a good lawyer with you who knows about banking and loan issues. If you're using a professional to help turn around the business, have them come with you, too."

TRUST AND FLEXIBILITY. Honesty and full financial disclosure are the only way to go. Trying to hide your business losses or skirting the issue of why you have failed so far, will only confirm your lenders' built-in suspicions that there are skeletons in your closet, says Donald F. King, a bankruptcy attorney and trustee working with the Fairfax (Va.) law firm of Odin, Feldman & Pittleman. "You're going to have to get past the trust issue and satisfy your lender if you're going to achieve a resolution that makes business sense for both parties," he says. You also need to be flexible, since the plan you put on the table isn't likely to exactly mirror the final agreement.

Be prepared for what may be a tough battle. If they are secured creditors, some banks may prefer to force you into a bankruptcy filing at this point because they know that they'll end up with a renegotiation of your payments under a court plan. If they're uncomfortable with your management ability, they may feel better knowing that someone else is in charge. M. Jonathan Hayes, an Encino (Calif.) bankruptcy lawyer, says: "Threatening to file bankruptcy isn't going to bring your lenders to the table, but if you're paying a high interest rate now -- something that a bankruptcy court is likely to reduce if you file -- then your lender may be more likely to reduce it voluntarily if you can convince them that doing so will enable you to repay the loan."


Have a question about running your business? Ask our small-business experts. Send us an E-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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