The traditional secured bank loan (inclusive of those backed by the Small Business Association or SBA) is the bedrock of commercial financing and debt. In this scenario, the bank lends a business owner money collateralized by assets which, if liquidated, will presumably cover the value of the note. In an ideal situation, the bank is fully secured, even in default.
The problem is, no matter how thorough a lending institution is during its underwriting and due diligence process, assets depreciate. Frequently at the point of default, assets are worth less than the debt, thus leaving the bank partially unsecured.
This is where Second Wind sees the opportunity to create a positive result for all parties involved. At the point of default, a primary lender has the right to liquidate underlying business assets at auction to their benefit. But from the lender’s point of view, this involves time, money, resources and perhaps most importantly, uncertain results. Second Wind’s approach, however, begins by creating efficiency and certainty for the lender, thereby eliminating the circumstantial risk.
First, a third-party completes a valuation of the underlying assets, which must be approved by the senior creditor. This establishes the expected return on the collateral through forced liquidation. However, rather than forcing the bank to liquidate those assets in an inefficient process, Second Wind will facilitate a third-party sale through a private transaction, which results in the liquidation of those same assets into a newly-owned, ongoing concern business entity.
This private sale is transacted by Second Wind through Article 9 of the Uniform Commercial Code, which maximizes the lender’s return while offering the advantages of preserving the core operation and value of the business.
When the ongoing concern of a defaulted business is preserved in this way, buyers of those assets receive an attractive entry price for a business operation which affords for incentives back to the seller in order to resolve personal guarantee deficiency balances.
In sum, when a conventional loan reaches the point of default, Second Wind’s Article 9 transaction will preserve underlying business value rather than allowing it to be destroyed through forced liquidation at auction. Creditors take advantage of a more efficient return on their collateral. Borrowers are provided with a successful exit and the knowledge that the business is preserved, all while avoiding the expense and risks of bankruptcy. By result, employees and the economy as a whole benefit from the preservation of the business activity.