10 Steps to Take When Your Loan Is In or Near Default

With the economy in its current state, funding can be hard to come by. For those who were able to obtain credit, the issue of not defaulting on their loan has become a large concern.

Business owners continue to work on their business strategy and business improvement and some are faced with what to do if their loan is in or near default. As posted by Scott Smith, on The Alliance of Chief Executives, here are 10 things you should do if you fear you may default on your loan:

"1. Read Your Loan Documents. Loan documents are written by and for lenders. They are exceedingly lender friendly, spelling out in great detail the various rights and remedies available to lenders. Except for one or two sections of a loan agreement specifying the amount and manner in which loan proceeds are disbursed, loan agreements are almost entirely for the benefit of lenders. Many borrowers accept this reality as a fate accompli, and do not even bother to read their loan documents in any detail, concluding that the documents are full of legalese or boilerplate that they can do nothing about. This is wrong and likely to lead to trouble with your lender.

Even in a market where credit is tighter than ever, and negotiation of terms is likely to be kept to a minimum, the prudent borrower reads loan documents from cover to cover. Perhaps even more important, the prudent borrower periodically re-visits his or her loan documents to ensure continued compliance. How can you know if you have or are approaching a problem with your lender if you don't even know what your loan documents require? All of the advice that follows is prefaced on borrowers reading and understanding the loan documents they have executed. If you don't do this, it is a fate accompli: you are in trouble!

2. Pay Attention to What Constitutes an Event of Default, Even If One Has Not Occurred. In this market, there is no such thing as a "technical default." Any and all defaults are likely to have grave consequences. Of course monetary defaults are at the top of the list, and you need to remain absolutely aware of your payment obligations and payment terms. If you have not done so already, you should consider direct payment options, which often provide for a reduced interest rate or other benefits and allow you to avoid slip ups as far as late or missed payments. Also pay close attention to your reporting requirements. You should map out for an entire year exactly what information you are required to provide to your lender and when. Your CFO or controller should obviously be included in this process, as well as outside accountants and auditors so everyone is in the know as far as your obligations."

Read the article…