Although the economy appears to be on the mend, many business owners still struggle. Especially those with commercial loans taken between 2007 and 2009. They either received, or will receive, bank demands that their loans are now due in full. Commercial loans typically have five-year maturities and most banks will not provide more than a one-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 one-year extension is most certainly feeling intense pressure from their bank to pay back the money–this year!
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 reportedly 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 usually, 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 business owner 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 business owners 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 business owner may experience temporary paralysis upon receipt of a bank demand, weigh the options, seek experienced representation and act.
About the Author: Since 1990, David Soble has represented lenders, loan servicers, consumers and business owners on residential and commercial real estate, finance and compliance issues. He has been involved in thousands of real estate transactions, being responsible for billions in real estate loan portfolios throughout his career. He has over 24 years of real estate and lending law experience to support his tempered cynicism.
Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own attorney.