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to keep your lender in the dark

If trouble strikes, it does not pay
to keep your lender in the dark

One way or another, it has grown clear that you won’t meet the next payroll, or the next tax bill, or perhaps the next loan payment. You are going to have to go to your lender and try to refinance, or find some other way to avoid foreclosure.
The experts will tell you to think of the situation just as you would a home mortgage. Say, for example, you were an employee of a business that hit the skids and had to let you go, or you have been “downsized” by one of the larger corporations. The prospects seem dim for both your career and your mortgage. What will you tell the bank?
Business owner or home owner, the answer is: Tell your lender everything, as soon as you can. Lenders like to lend; they don’t like to foreclose.
They will tell you that when there is a foreclosure, nobody wins. But banks are a little bit like psychiatrists. They can’t help you if you don’t give them information about the problem.
“The key for the customer is to take the initiative and notify the lender as soon as possible if you anticipate having trouble making payments,” says Michael Catalino, a mortgage consultant with Fleet Mortgage.
Fear of the bank is a common but unnecessary phenomenon, he says.
“The lender’s goal is to work with the customer by offering counseling and possible restructuring of payment. Refinancing is easier if you let us know as much as possible, as early as possible.”
Catalino cautions that the servicer typically does not own the loan, so it may be contractually limited as to how it may assist a client. But foreclosure is the worst thing that can happen to all parties, he says.
“It’s a losing proposition for the lender as well as the customer, considering legal fees and the loss to the bank of income derived from the loan.”
Catalino suggests dealing directly with the lender’s customer service department, using the 800 number printed on the bill or payment coupon book.
“The lender may at times make arrangements for a reduced payment over a set period of time,” he says, “such as the payment of interest only and no principal. It’s difficult to give specifics, because every client’s situation is unique.”
The key to avoiding trouble in the first place, Catalino says, is to get on a budget early in the game.
“Know what’s coming in and going out. And take advantage of credit counseling services which may be available locally.”
Peter Flihan, Rochester branch manager for the Small Business Administration, says it is the same for business loans as for mortgages.
“The first party you should apprise (of any difficulty) should be your lender,” he says. “The most important thing is to maintain an open dialogue and not try to evade the creditor. It’s critical not to jeopardize your credibility.”
Jane Plitt, president of the business consulting firm JP Associates, agrees.
“If you’ve waited for your banker to get nervous, you’ve probably waited too long,” she says. “It’s very important not to play games and jeopardize the relationship, the basis for trust, that you have with your lender.”
She recommends taking a proactive role. If a major client has put a four-week hold on a crucial payment, call your lender, explain the situation and offer to pay a quarter or half of your current installment.
“It’s important that you be able to offer something,” she says. “And let your lender know … that you’re simultaneously launching an effort to market to a more diverse client base.”
Lenders ought to understand your business and customer base, and will know whether the errant client can be counted on.
“You can go bankrupt on receivables,” Plitt notes.
Plitt echoes Catalino’s and Flihan’s reassurances that the lender does not want to foreclose. But if your cash flow forecast really does spell nothing but doom, she says, it is critical to visit the lender–in person, not over the telephone –with a plan of action.
“Maybe this is a good time to rethink the scale and nature of your business,” she adds. “Do things have to be the way they have been?”
That question may apply to staff size as well as the nature of your product or service.
Plitt adds that a variety of public financing is available, though under review in the current political climate. These grants and loans typically are for new-product development, not for refinancing.
“Turn the lemons into lemonade,” she says.
She offers one warning, however: Nothing will wear out a relationship with a lender faster than a cavalier attitude toward restructuring.
Finally, she says, there is no reason to feel guilty or inadequate if your first experience as a small-business person founders.
“George Eastman didn’t make it on the first go-round,” Plitt says. “There’s no shame in appealing to family and friends, for love and support and maybe even for equity.”
(Bruce Beardsley is a Rochester-area free-lance writer.)

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