Why You Need A Workout Strategy For An SBA Workout
With less than 2 weeks before the end of the second quarter of 2016, the SBA has announced a series of Workout Strategy sessions. The previous Workout Strategy sessions saw a cancelled SBA 6(a) loan workout, a forbearance agreement, and overall a proposed change in procedures for working capital and operating expenditures for the business.
Most of these proposed changes took place in the second quarter of 2016 and those will expire by December 31, 2017. A proposed change that would allow the SBA to cancel a 6(a) loan workout program and allow a short forbearance agreement on extensions is now discussed.
If this change is approved, it will mean that working capital loans will no longer be automatically forgiven as part of the default. Instead, borrowers will have to become good faith providers.
Good F600s have been so beneficial for so many businesses that they are being adopted now by many outside the SBA guidelines. The 6(a) terms will now let lenders use previous working capital loans as part of the extension of the 6-month term. For example, if a bank with a 7-year term at 10% is a borrower, and they want to keep their 10-year term, but they want to extend that term for a year, then they can use their 6-year loan as a 10-year loan and roll over their balance. Banks that typically have shorter terms will automatically use the 6-year balance. If a bank has 15 months, they can use the 15-month balance.
With most banks, where the balance is paid in 3 instalments, it is actually possible to extend the period beyond 10 years because if the overall credit limit is high, then the borrower can get more time and use the additional time to pay in instalments. The only catch is that the borrower will have to take on some additional risk by extending the term. Whether they can or not will depend heavily on what kind of collateral they have and whether they can offer sufficient security. For a small business borrower, securing business working capital can be a weak spot because it is expensive to secure. Whereas SBA lenders are willing to work with it. And this change does not come without significant risk, because if the borrower defaults on the loan, then the collateral becomes the SBA’s problem.
This would mean that if the loan cannot be repaid on time, then the SBA would rather receive a portion of the payment back in the form of repayment rather than nothing. While this may seem like a high price to pay, the reality is that it is negotiable. Provided that the borrower can present a prominent case going out of their way to demonstrate the reasons why the loan should be modified.
Of course, the new proposal also comes with a number of exceptions. These are for busy industries which may not be in a position to secure such property or where risk standards are not sufficient to approve the loan. These two areas include Software and Strategic Development Programs.
Generally, these are for more risky transactions where a number of parties must be interested. The software industry is a good example of an industry where there is a high degree of risk, yet the transaction can commit the only remaining asset of the company. The SBA is obviously seeking more risk, as they are willing to take more risk. This will reward the bank with a loan modification if the borrower is able to show that they are in dire need of the strategy.
Another exception would be where the strategy involves replacing capital equipment for something else. In some cases, replacing capital equipment with software and assets sold will free up the cash flow of the company without having to repurchase expensive equipment. So this shows that financials can be combined with other assets.
The third exception applies to Business Acquisition Strategies. Again, the main reason for the six-month term is to give the borrower additional time to come up with a plan, offer a reasonable buy down, and get their company in a position to move out of their present facility and into something profitable. Especially at the beginning of the program, bankers are less likely to want to lose out on receiving third party capital invested into a purchase. This will mean that more assurance will be required.