Think Before You Borrow
As Vice President at Second Wind and head of workouts, I spend all of my time consulting with clients who have crippling debt issues. They have borrowed an unsustainable amount of money to either aquire or start a business and now have defaulted due to declining revenues and no ability to make up for their cash shortages. They come to us to negotiate a settlement on their personal guarantees, wind down or sell their business or create some type of exit strategy. Although my business deals in working out past debt, I have a few suggestions for the current borrower.
DO NOT GIVE THE BANK COLLATERAL YOU ARE NOT WILING TO PLEDGE!!
I recently had a client who owned a franchise business in the Midwest. My clients bank was becoming very aggressive and was well collateralized. They held two Deeds of Trusts against my clients home as well as their mother’s. Their mother’s home had significant equity and was well exposed. We were able to negotiate a refinance on the home to pay the bank off short and were able to get them to release their lien, but it cost my clients mother much more than she ever thought when the loan was taken out.
Why did this happen? How does a business owners mother who was never involved in the business get so tied up in this mess? Here is the background story. Back when my clients were obtaining the loan they were so excited to obtain funding and start the business of their dreams. They were pre approved by the bank and the franchise they wanted to acquire, so they began executing their business plan. They signed a lease, started a build out and quit their jobs before even closing on their loan! When they came to the closing table they were told they could not obtain the funding without additional collateral. So their mother offered her home. Huge mistake.
Why did they begin spending cash without a loan closing? Why did they ever sign a lease without a final loan approval? Why quit their existing jobs? These mistakes are all too common however. The borrowers were so anxious and emotionally involved in just getting the business open, that they made the mistake of pledging more collateral than they wold have liked to.
If ever borrowing for a business acquisition, never make any preemptive moves. Line up your financing with final approval and a full understanding of the collateral requirements. Never take on other obligations before your primary funding is issued. Always leave yourself an opportunity to walk away if the final terms are not satisfactory. Always think before you borrow.
