By David B. Deutsch
April 2, 2009
Global economic challenges are having a profound impact on how companies are attempting to increase the cash flow for their existing operations. If a company is not in a financial crisis mode, it may be able to negotiate more favorable terms with its landlord, suppliers, lenders and vendors.
This can be accomplished by renegotiating the existing terms of their loans, leases and other regular expenditures in order to alleviate cash flow problems. In the past, it was rare that companies would even consider such a practice. However, eliminating additional costs and expenses may ensure a company’s financial health during these challenging times.
Unfortunately, renegotiating the terms of a company loan may not always be possible with all banks. If a company is in the automotive-related field (i.e., supplier, manufacturer, etc.), it may have a more difficult time having its loan terms modified by its bank. In extreme cases, banks have even expressed their intent to terminate their lending relationship with an automotive-related company who never missed a loan payment.
A mere violation of a financial covenant by a company has provided the banks with the purpose and intent to terminate the lending relationship.
Moreover, banks are taking a closer look at a company’s long-term viability and whether its cash flow problem is expected to be a short-term or long-term issue. Banks are obviously concerned about “toxic” loans in this environment, which makes a company’s collateral, together with its ability to meet its financial covenants, a critical aspect when a company renegotiates a loan.
Shopping around for other loan options if a lender decides not to work with a company in renegotiating its terms is difficult, but not impossible, in this environment. Generally, banks require financial data that foreshadows future cash flow increases. A company that requires debt relief in the short term is not an unusual case given this economy. Accordingly, it is important that a plan be presented to the bank that debt relief will be less of an issue in the upcoming months and years.
If a company meets the bank’s requirements, it may be willing to consider interest-only agreements or a short-term forbearance, essentially relieving a company from having to pay its loans for an agreed upon period. When renegotiated terms are accepted, a company’s or individual’s (owner’s) credit should not be adversely impacted provided they comply with the terms of the new agreement.
As with any business decision, there are potential pitfalls that await business owners who want to renegotiate certain credit terms. Many creditors, especially banks, are looking for a personal guaranty before considering loans in this economic environment.
One crucial mistake of a business owner is having their spouse personally guaranty a loan. Spouses should never be part of a personal guaranty, since that would expose all of the couple’s personal assets (including their home) in the event of a default. In today’s world, there are many situations where defaults can be triggered on loans without the borrower ever missing a payment.
Renegotiating lease terms is another strategy which a company may implement to improve its cash flow. Landlords may be in a more agreeable position to negotiate with a company due to the high percentage of available commercial and industrial space available for lease in Southeastern Michigan.
Many companies have been able to renegotiate their current lease and/or extend their lease term in exchange for a smaller lease space in the landlord’s building. Similar to the lending situation, a business owner (and spouse) must be aware of personally guaranteeing the lease payments.
In summary, if a company is in need of additional cash, negotiating bank loans and lease terms are a great planning opportunity to be considered. For such companies, the goal is self-preservation, and trying to survive what is expected to be one of our country’s toughest economic times.
David B. Deutsch is a partner with Lipson, Neilson, Cole, Seltzer & Garin, P.C. in Bloomfield Hills, serving as an advisor to entrepreneurs and emerging businesses, guiding them through the planning and operational stages. He can be contacted at [email protected].