All businesses ride economic waves. Some are able to identify economic headwinds and adapt accordingly; others will be unable to adjust and find themselves in dangerous waters. Current economic conditions are putting the squeeze on many small businesses as inflation, interest rate hikes, and rising overhead costs chip away at margins and make a business appear riskier to lenders.
When this happens, a company’s loan may move from their existing relationship manager to the Special Loans group, which may demand more rigorous financial and accounting practices be implemented by the business. Whether your lender moves your loan to its financial restructuring, specialized loan servicing, or special accounts management team, most large lenders will have a Special Loans group dedicated to servicing accounts in distress.
Why is an account transferred to Special Loans?
Lenders operate under specific governance policies and procedures, where risk ratings are integral in determining whether or not an account is recommended for transfer to Special Loans. If a customer begins experiencing weakening or poor financial performance, and/or breaches financial and non-financial lending covenants, lenders will generally want to assist their customer. Depending on the borrower’s attributes (e.g., business viability, available financing, quality of management), economic conditions, and industry trends among other criteria, the lending side may choose to transfer the account to Special Loans.
What happens once an account is in Special Loans?
Personnel in Special Loans are trained to deal with customers experiencing financial challenges. Unless the account was transferred due to fraudulent behaviour of the company or its principals, or it is clear that the business is no longer viable, the role of Special Loans is typically to quickly assess the issues and work with their customer in implementing a rehabilitation strategy. The ultimate goal is to eventually transfer the account back to their traditional relationship manager.
Because of their financial issues, the borrower may be expected to increase and enhance their reporting, in which may require a format and frequency to which they are notaccustomed. Not only will they be required to measure financial and operational metrics, there will be increased focus on weekly cash flow reporting, likely on a 13-week rolling basis. The borrower will often also have to develop a “workout” plan, which addresses realistic strategies to increase sales or margins and, if necessary, rationalize costs. In more serious situations, the lender may call for additional capital or security to be provided by shareholders and/or guarantors of the indebtedness to the lender.
How long will an account be in Special Loans?
Much like each company is unique, each case before Special Loans is different. While one role of Special Loans is rehabilitation, its ultimate goal is to protect the lender while preserving enterprise and collateral value. Accordingly, it is important for businesses to accept and understand the situation, which will enable open and honest communication and cooperation among the borrower and the lender. With both sides working together, the path back to a standard relationship will be more likely.
Special Loans is a specialized area of practice that can benefit from consultations with financial advisors. If you require guidance on communicating with your lender’s Special Loans group, or need assistance preparing the detailed financial information your lender is requesting, we can help.