Empowering Small Business to Repay Debt
The Coming Paradigm Shift from Creditor to Debtor in Loan Repayment Solutions
Paradigm Shift from Creditor to Debtor
You must have your say as to what is appropriate in terms of your ability to repay
NCARA believes you need to be the one to call the shots on exactly how much and when you will repay on a best-effort, fully documented and supported basis. With balance sheets laden with too much debt, and facing a world of uncertainties, NCARA believes there must eventually needs be ‘seasons of default and restructuring’ to reset debt obligations on a best-effort basis – and that debtors will lead the way for resolution strategies, not creditors.
When it comes to debt resolution in periods of economic downturn, there’s going to be gaping canyons between debtors and their creditors, unless/until there’s a paradigm shift from the old model where creditors took the lead. Lenders are pretty good at getting loans approved in just days, if not minutes – depending on the size and complexity. Creditors, however, are not as good at getting the money back.
When credit metrics deteriorate at financial institutions, it takes a lot of work and time for the stakeholders to come up with the right solution. Creditors may or may not have the resources to service multitudes of underperforming borrowers, so you shouldn’t count on it – even if times are not overly distressed. Don’t be surprised if you find yourself in an automatic foreclosure or liquidation environment, that mirrors that automatic approval you got in the first place. Ask yourself if you think you’re going to get the time and attention you deserve when and if your financial institution’s credit metrics become too stressed.
As you can appreciate, financial institutions are regulated; asset quality is the elephant in the room – your loan(s). Lenders really understand credit risk, your ability to repay pursuant to the terms and conditions outlined in Promissory Notes and Loan Agreements. Your loans are risk-rated accordingly. Once loans are criticized or even classified due to deteriorated financial conditions, the clock really starts to click to get to resolution. This means that your banker’s new objective is to get your loan’s risk rating upgraded back to a ‘Pass’ rating through adequate financial performance, or to a $0 balance through whatever means necessary – take your choice. Lenders are required to be prudent, and maintain safe and sound banking practices. You will be required to fit within those walls of reasonableness, or the lender will take things into their own hands. You must have your say as to what is appropriate in terms of your ability to repay, and creditors will listen carefully to what you have to say.
The challenge is that debtors fail to understand what and how lenders think – especially during downturns. Hence, the lender will take your financial statements and tax returns and come up with the repayment solution they feel is appropriate – for them. Yes, the lender likely holds the superior cards and can force your hand, but it’s your signature on the Promissory Note(s) – you do have a huge say in these negotiations. You need to better understand what the lender sees and wants so that you can show him what you intend to do, as their conclusions may not actually be what works best for you at this time. Unless you understand why the lender is offering what he offers, better yet, if you understand what you need and can pitch the appropriate repayment strategy, you will likely prevail and stay in business. You have to have a win-win result, and that’s in everybody’s best interest.
For all these reasons, NCARA’ primary function is to help bridge the gap between small business and its creditors. Once again, NCARA believes there needs to be a paradigm shift from the creditor taking the lead and formulating restructuring plans to that of the debtor preparing, presenting, and negotiating with creditors as to how and when they will repay loans they promised to pay. Debtors need to step forward, prepare, and take full responsibility for their debt repayment obligations. They should know that they are also entitled to negotiate repayment solutions on a regularly adjusted best-effort basis.