Commercial loans typically have 5-year maturities and most banks will not provide more than a 1-year loan extension of the maturity date to pay back a loan. For example, a business owner who took a loan out in 2008 with a 2013 maturity, and received a 1-year extension was most certainly feeling intense pressure from their bank to pay back the money in 2013!
There are three realistic options that a business owner should consider when their bank demands payment of the loan in full:
- Pay off the loan. In today’s restrictive banking climate, refinancing sounds much easier than it really is. Banks infrequently rewrite their own commercial loans upon maturity. This is because the financial position of many small businesses has diminished since 2007. Also, lending guidelines were more “flexible” then, with commercial properties having higher values. So unless a business owner has a load of cash to pay off the loan, refinancing with the same bank is almost impossible, and securing funds from an outside bank is increasingly difficult.
- Negotiated Exit. Be assured that if a loan has matured and the borrower is not prepared to pay it off, the bank will begin a lawsuit. Defending a lawsuit can be expensive, but in most cases, it will only delay the inevitable. Absent real legal defenses for bank misconduct or the mishandling of a loan, the best approach for a business owner is to negotiate a realistic “exit” from the bank with the assistance of experienced counsel. There are numerous variables for consideration when negotiating a forbearance or settlement agreement, so unless a borrower is familiar with bank work-out or special asset protocol, retain an experienced attorney.
- Reorganization. Chapter 11 reorganization can be expensive, but it is an excellent remedy for borrowers when a bank acts in bad faith or has become a relentless and unreasonable collector despite all of the borrower’s repayment efforts. A Chapter 11 bankruptcy should be a final option, but it will halt collection actions and enable a business owner to restructure its business debt under court supervision. Chapter 11 legal practice is highly specialized and complex, so seek a business bankruptcy attorney who can demonstrate past results.
There are few choices a business owner can make when their bank issues a demand for repayment: refinance, fight, negotiate, or file business bankruptcy. Doing nothing, however, is unacceptable. It’s a recipe for financial disaster, and while a borrower may experience temporary paralysis upon receipt of a bank demand, weigh the options, seek experienced representation and take action.