Preface: Special asset departments handle distressed loan situations. The uniqueness of bank workouts is something few entrepreneurs should sit alone at the conference table with when involved in special assets department situations. The low cost of trusted advisors is the best investment you can make when you have a special asset department loan.
The Special Assets Department
Before you sign on a loan, you should know about the special assets department.
The special assets department is the banking arm that handles distressed loans. When a loan is assigned to the special assets department the bank has decided the risk associated with the loan(s) is at the top of the risk ladder and requires special attention. Special asset departments are also know as workout departments. Breech loan covenants, missed payments or certain business activities indicate that repayment to the bank is an uncertain risk, and your loan may be placed in the special assets department.
If you receive word from your friendly banker that your loan is being placed in special assets, the first step should be to obtain a knowledgeable and trusted advisor to speak into the situation. Special asset’s is a high stakes “chess game” with the bank. Coordinating loan repayment with adeptly experienced bank workout specialists and understanding all options in accordance with original loan documents to rights and remedies of loan repayment, including bankruptcy, is challenging. If you didn’t have attorney’s read and edit your loan agreement before loan signing, with the special assets department, your chattel, even the dishes in the cupboard and art on the walls, may be at risk.
Meet with the bank. Discuss how aggressive the bank will be reducing loan risks. What are the options to resolve the banks concerns? Have your trusted advisor sit in on the meetings and be involved with workout planning. Proper planning with an experienced advisor, i.e. attorney or CPA, to prevent further deterioration of your business asset is paramount. Dismantling of your business to sell collateral assets such as equipment, furniture, and buildings may not be the banks intention, yet, but don’t underestimate the seriousness of the special assets department. Protect your business assets with trusted counsel. An experienced attorney can guide your legal options when the stakes are high.
Be as cooperative with the bank as you can be; it will improve your opportunities to egress the special assets departments without a “checkmate.” Anticipate additional fees. When you need cash the most, the bank will want to request new appraisals, more frequent inventory counts, additional financial reporting, and attorney prepared documents – all at the expense of your business. You are obligated to pay the fees.
Managing cash flow is the homepage in a workout environment. Prepare a rolling quarter cash flow projection even if the bank doesn’t require it. Develop a workout plan with your trusted advisor; the bank may even require you to engage a qualified workout professional. Discuss the options, discuss the risks, think through scenarios and plan for a better future.
Special assets are most often the result of lender fatigue. Every workout is sui generis. You should not sit alone at the conference table with the special assets department. The low cost of trusted advisors is the best investment you can make when you have a special asset department loan.