1. Don’t be afraid to inform your bank of the difficulties you are facing
Businesses face good and bad times, which mostly have to do with factors beyond the control of the borrower. So when you think your finances are short and may not be enough to repay your loans when they fall due, inform the bank of your predicament without using the word “default”. Let them know external factors beyond your control are causing setbacks to your finances which is not likely to continue in future. Also inform them that you are working extremely hard to put things in place so that your income is not adversely affected by economic realities.
2. How much can I possibly pay the bank now?
You must first identify what your average cash flow is monthly, assuming your loan is serviced monthly. For example, if at the time you initially obtained the loans your cash receipts was N150,000 and you paid the bank N100,000 then it means you had a debt coverage of 1.5 times. If now your cash receipts has dropped to N100, 000 and you wish to maintain your debt coverage of 1.5 times then it means you will be looking to repay the bank N66, 666.66. You may also revise this down to N50, 000 just to give you a buffer in case of downturns as the bank may not be willing to restructure your loan again. In the example above, by reducing your cash payment to the bank, you have basically increased the tenor of the loan as well as interest payments.
3. Approach your bank
Set up a meeting with your bankers and make sure it’s a friendly and cordial setting. Tell them your plans in the clearest form and give an impression it’s an honest and well thought out plan. Make them understand how a restructuring of the loan is the best option and how it is a “win-win” situation for the bank and you. They may come with their own proposals, which may or may not be better than yours. Whatever the case just remember the initial objective is to avoid default and ensure your business is kept running.
4. Forward an official letter to the bank
After you must have concluded negotiations with your account officers, you should now write them officially requesting for a restructuring of the loan. Refer to your discussions with them and include the terms you had suggested above even if they did not agree with it. Sign the letter and make sure you get a dated and stamped acknowledgement copy.
5. Post restructuring
Once your offer has been approved, the bank will give you a restructured facility with terms and conditions. Make all efforts to read the fine prints as banks notoriously embed details in it that may not be in your best interest. Ensure you look out for the following
** Tenor – Make sure it’s the number of years/months you mutually agreed with the bank.
** Interest Rate – Always check that interest rates are tied to benchmarks.
Sometimes they tell you its “subject to market conditions” or “MPR plus 12 per cent”. Accept the latter as they make for easy management of your costs. Also make sure your offer rates are competitive. To make sure, consult your accountant or friends in other banks to find out what market rates are.
** Fees – When you are restructuring, the banks typically will charge you a “restructuring fee”, “management fee” and facility fee”. Restructuring Fee is a one off payment and can range from 0.25 per cent to one per cent of the loan. Always negotiate for 0.25 per cent or lower. It is possible if you make them understand you can’t afford it. Whatever the case, strive for a total fee that will NOT cost you more than 0.5 per cent per annum cumulatively.
** Security – Make sure the security (collateral) they are asking for is what you agreed with them during negotiations. Do not for exigency accept terms that may result in the mortgage of your future. Your loans should be relative to the risk it bears. For example, you do not put up your house as collateral for a car loan.
** Caveats – There are usually loads of clauses and caveats that are found under “Other Conditions”. It can be burdensome to read but since it’s your financial health on the line, I suggest you read them.
Sign a copy of the offer and keep an original for yourself
Explore ways of improving your financial situation to ensure your cash receipts increase or at worst remain sustainable. If you are an employee who took a consumer loan, then you may have to seek for a higher paying job or cut down on expenses to ensure you are financially healthy. The last thing you want is a repeat.
Whilst these are basic steps to guide you, it is advisable to consult your financial adviser.
Credit: UGODRE OBI-CHUKWU
