Posts Tagged ‘special loans’
What Type of Business Financing Can You Secure To Payout Your Special Loans?
February 17th, 2010
If you find yourself in special loans with a major bank for whatever reason, there is going to be some urgency to get them paid out before they start realizing on security.
There are a whole number of ways you can get into special loans, the most common is when you’re offside with one or more of your loan covenants. But even if you’re onside with everything, the bank doesn’t have to have a reason as these loans are typically made on the condition that repayment can be demanded at any time.
So, regardless of how you got there, the bank has stamped special loans on your forehead and are either trying to squeeze the cash out of you drop by drop, or have set some sort of deadline (typically between 30 and 90 days) for repayment to occur before they start realizing on security.
So what are you’re options?
If you’re truly not offside or only marginally offside on your covenants, you could potentially go to a competitive bank that is currently interested in your business profile and industry.
The first challenge with that approach is that other banks are going to think there is something more seriously wrong to warrant the special loans tag, so they may not give your request any serious attention.
The second challenge is that even if they are interested, they may not be able to move fast enough to assess your application and get financing in place before your bank starts trying to realize on security.
A bank refinancing request for several million dollars can take 60 to 90 days, or more to complete, depending on the assessment process required and the conditions that need to be met.
So, when pressed for time, and requiring a higher probability of success, many businesses turn to asset based lenders.
For service companies that may only have accounts receivable to offer up as security, factoring becomes the only viable option in terms of speed and predictability. But to even make this work, there will need to be enough margin to cover the higher cost of financing. While a bank line of credit can be right around prime, factoring will run at 1.5% to 2.5% per month.
For businesses that have physical assets, there are more options to consider.
With real estate, it still may be possible to get an institutional lender to provide financing at similar rates to the ones being paid out, provided that there is a recent appraisal and environmental audit completed.
If time is of the essence, then private real estate financing may be arranged at 65% loan to value and interest rates around 10%. There typically is only one year terms on this type of money, so you’re basically signing up for a one year bridge loan before refinancing will be required again.
Equipment refinancing will likely be based on a percentage of forced liquidation value with rates in the lower to mid teens.
If the business has a high investment in accounts receivable, inventory, and equipment, then a working capital form of asset based loan can be arranged utilizing all short term assets as security at rates from 18% per year to 30% per year.
And for any asset based solution, there are likely going to be lender fees to pay as well, making the exercise more costly.
If you spend too much time trying to secure a cheaper financing solution for refinancing, you could run out of time and potentially be out of business.
Bottom line, you want to avoid the special loans tag at all costs. A fast refinancing, if possible, is going to be expensive, and destroy a lot of value in the process.
Yes, every one wants the lowest cost financing, but lower cost financing is not only low risk, but very fickle as well, especially during economic down turns. And everything is set up so the plug can be pulled at any time.
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Business FinancingBusiness Financing | Why Special Loans Aren’t So Special
December 28th, 2009
Things To Consider About Having A Special Loan Status
In Canada, banks call business loans that are not meeting their required financial covenants as “special loans”. I’m not sure what they’re called in other parts of the world, but the implications are the same.
When a loan falls into the special loan category, the bank must now decide what their course of action is with the account. In 2009, word has it that there are large numbers of special loans on the books due largely to the impacts of the current recession. And unlike past recessions, the banks appear to be a bit more patient with borrowers or at least they have been to this point.
In the past, when borrowers would fall out of covenant, the special loan officers jobs were to help get the loan back on side, or figure out an exit strategy for the bank to get their money back. In most cases, the latter tended to occur both frequently and quickly. This time around, the banks have been going to greater lengths to work with clients, especially those that are marginally offside with their requirements.
And perhaps this has been a good strategy to maintain bank revenues. With recessionary forces in affect basically all of 2009, lending is way down with much of the decline directly attributable to lenders being more cautious with new lending approvals. So working with special loan accounts, at higher interest rates due to the higher inherent risk, has created a new source of earnings. So you get a double win… fewer loan right downs and higher net average earnings (in theory anyway).
But is this likely to continue in 2010.
Its hard to say.
As recessionary forces subside, new lending will be more prevalent, perhaps creating the opportunity for lenders to return to past practices of getting their money out of special loans as fast as possible.
But if there is any type of government support available to lenders to offset the higher risk they’re carrying in their portfolio, then perhaps this “working with the client” strategy will continue.
Regardless of what does transpire, one should always be concerned with carrying the special loan (or its equivalent) tag. Lender policies can change quickly and just because they have been working with you in 2009, there is no guarantee that this goodwill at higher rates will continue into next year.
For any business owner classified with a special loan status, they would be well advised to thoroughly assess their refinancing options with other sources of capital and repeat the exercise every quarter to make sure they are on top of what plan B and C may look like if the banks choose to go in another direction.
Things can change quickly and refinancing a business can be very time consuming, so its best to spent time not only trying to get the lending covenants back in line but also to build out a contingency plan to keep the business a float in the event of a change in lender strategy.
Business Financing