Businesses across Nigeria face difficult challenges meeting debt obligations with banks leading them to a default in loan repayments. A lot of this boils down to two things, harsh economic environment, high and cash flow mismatch. Cash flow mismatch can be a combination of high interest rates and very short tenor making debt payouts higher than cash inflow. If not tackled swiftly and diligently loan defaults can be a recipe for insolvency and eventual shut down of a thriving business. That makes getting out of debt a very critical aspect of survival of a company. Here are steps you can employ when faced with bank defaults
1. Identify Cash Flow Compatibility – The major cause of default in loans is the inability of the debtor to generate enough cash to repay debt obligations. This is a cash flow mismatch. Therefore, the first thing you want to do is to create a financial model that tells you the minimum cash you can generate periodically to be able to repay debts as and when due. This information is critical to restructuring your loans as you would find below.
2. Come up with a business plan – If your business is encountering difficulty in repaying the loans because revenues is tanking, then your initial efforts must be directed at ensuring the survival of your business. This is important because if your business is not doing well you will still default even if you succeed in restructuring the loans. Tough decisions may have to be taken in the course of doing this provided it is in the best interest of the company.
3. Identify Potential Sources of Repayment – You must also make a list of various sources of repaying the loans other than from the cash flow the business is generating. It could be through sale of assets, raising fresh equity or even getting a debt pardon. These are incremental cash inflows that can help reduce the loans significantly helping you achieve a restructuring. For example, if your business has assets that it can sell other than its inventory, the cash generated from such sales can be applied to repaying the loans.
4. Commence Negotiations With your Bank – When in default, it is important that you know banks may consider a mutual beneficial solution provided it is logical. As such, you must offer a concise plan that will clearly show how you intend to pay back the loan. The intention shown to the bank is a clear indication that you are that you are indeed willing to repay the loan. However, it is important to note that your plans must not only be logical but must be reasonable and also feasible. You cannot ask the bank to grant you 20years to repay a loan that initially had a tenor of 2yrs. You must also show a desire to repay the loans by showing major changes in your operational structure. This is also the time where you call on your economic capital and calling favours from people who can assist in your negotiations
5. Explore refinancing options – Whilst negotiating with your bank, efforts must also be channelled towards identifying options of refinancing the loans from another lender. The government via Amcon and other state owned banks provides a way out for industries struggling with harsh operating conditions to renegotiate loans at considerable terms. You can approach the likes of Bank of Industry, Nexim Bank etc to help refinance local debts that have punitive interest rates.
6. Obtain Debt Restructuring Facility– Whilst you explore other forms of refinancing, ensure that you complete the debt restructuring as soon as possible. This is important because it saves you time, gives your entire debt repayment plan a focus and also helps stop punitive charges arising from frequent defaults. You should set a timeline for this stage which should take be more than two months from three above. Though a tight timeline, your determination and negotiating skills should see you through.
7. Remain Modest – You must also perform some self introspection, be modest and stop displaying any form wealth. You don’t want to be seen living a very luxurious lifestyle whilst looking to sort out bad debts. During the economic crisis of 2008, some bankers in Wall street flew on Private jets to Washington for a meeting with the government to seek bailouts. This was a PR disaster for them as they were heavily chastised by the government, press and public at large.
8. Learn Crisis Management Skills – This is probably the most important asset you need to have when in a debt crisis. Crisis management skills are very necessary this period as various challenges will suffice which can sometimes get out of hand if not handled carefully and professionally. You will have to constantly wear your thinking cap and show very strong interpersonal skills. Remember, people look up to you as the boss and as such your disposition matters at all times.
9. Start Repaying the loans – The first step post restructuring is demonstrating your willingness to repay your loans. Therefore you must make sure you adhere to the terms of your restructured loans. It is understandable that things can get worse before it even starts to get better. This may mean defaulting further on loan repayments threatening to jeopardise the survival of your company. To avoid this, make sure you at least make loan repayments such that it covers 90days outstanding interest payments. This is particularly important for restructured loans and for the banks as this is the minimum requirement provided by the CBN for restructured loans in its Prudential Guidelines released by the CBN. This relieves pressure off the bank and eventually off you giving you time to explore other options.