Smart Answers

When Your Business Can't Repay a Bank Loan


Business turnaround expert Jim Martin has had an insider's view of the Great Recession as he works out loan repayment troubles between banks and middle-market companies still scrambling to recover. The founder and managing partner of ACM Capital Partners, a $3 million turnaround and financial restructuring company based in Miami, says he still sees market "softness" but is optimistic about increased availability of credit and private equity investment for small businesses. Martin, who has been in the corporate turnaround industry for more than two decades, spoke recently to Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

Karen E. Klein: You have seen a lot of declining companies in the past couple of years. Was lack of demand the biggest problem?

Jim Martin: There was such a precipitous drop in the economy. It was the speed at which we saw this recession approach and take over, coupled with the banks' own issues. And it was exacerbated by the runup of personal debt of the individuals who own companies. They either made huge personal investments in their businesses or they bought toys—Lear jets and yachts—when debt was cheap and aplenty.

Has your business seen a boom during the recession?
In '08 and early '09, our business was basically nonexistent, despite the fact that was the worst time. It was because people were scared to part with a dollar for anything. The Dow was down; we all thought the world was coming to an end.

As people started to see the landscape a little clearer, they were willing to spend money on advisers like myself to help get through their issues. My business started to pick up during the second half of last year and now we have a whole slew of deal flow and activity, generated by both bankers and borrowers.

What are you seeing on your clients' balance sheets right now?
The recession may be officially over, but its effects are still being painfully felt by owners of middle-market companies, their management, and lenders. I'm looking specifically at many companies in the construction industry in South Florida, where the experience of the recession has been particularly hard.

But I've also got a client that is a last-mile trucking company who does a lot of retail business and we're still seeing softness in his business. That's exacerbated by fuel costs and balance sheets that are not cleaned up, both on the family side and the small business side.

So, many companies are still suffering. We're in April of 2011 and I'm seeing cases where the bank is asking us to liquidate retail locations that survived the worst of times. I don't think we're where many would think we are from a recovery standpoint.

What's your advice for small and midsize business owners who start having difficulty making loan payments?
They have to act quickly. When the banks come and request information, or are bearing down on them, the worst thing they can do is ignore it or not provide communication back. It scares the banks to death. The banks are not in the best of shape, so when you have a borrower like that, it just exacerbates the situation.

Why do business owners react by stopping communication?
Mostly they're running scared. That entrepreneur who started the business and grew it from $1 million to $150 million may be back to $70 million or $80 million. They often don't have a sophisticated team around them. They'll call somebody a [chief financial officer] who's really a controller at best. They know their way around a P&L statement or an auditor, but when it comes to communicating with sophisticated third parties, they don't know how to act.

The bank translates that as failure to communicate, or shutting down, and it starts a death spiral where they throw things to their attorneys. I've got a $6 million deal right now where the owner of a construction company is ready to take the company into bankruptcy. I reached out to the head of the bank's workout group for the whole region. I told him, Sit down and talk to this guy or you'll get 10 cents on the dollar.

What do you do when you're hired to intervene?
Sometimes we're brought in by the banks and other times by the businesses. If we're brought in by the business owner, we immediately take control—as much as we can—of the company's cash flow. And we immediately start dialogue with the bank, which defuses a tough situation.

We analyze the credit, analyze the situation, and then quickly report back to both sides about what the company's balance sheet can support in terms of credit. Our goal is to help restructure the debt so that the business survives and the bank can maximize its recovery.

Are you finding that you can get troubled companies new lines of credit?
Yes. We've refinanced over $800 million in the last three years. The good news is that the dry powder in private equity—the capital available to invest in companies in North America today—is half a trillion [dollars]. It's the largest private equity overhang since private equity was founded.

With that excess liquidity comes the ability for the businesses to borrow. There are a whole slew of new, nontraditional lenders in the marketplace that are equity financed and do asset-based loans with rates of 10 percent to 13 percent.

Are you advising clients to take out those kinds of loans?
We're using that available credit to take out senior debt when we can't get bank financing. It's expensive, but not egregiously so, and most can handle it for a year and a half or so. In that scenario, you want someone in your corner to advise you when you are really bankable again so you can move into cheaper credit.

We're also using the SBA's 504 loan program that is now in play. We've found it's an excellent tool to refinance real estate and hard assets.

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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