Businesses across Nigeria face difficult challenges in meeting debt obligations with banks, leading to defaults in loan repayments.
A lot of this can be attributed to the harsh economic environment and a mismatch between cash flow and debt payments. This is especially now that interest rates have increased due to rising inflation rates across the country.
These challenges have led to making debt payouts higher than cash inflow. If not addressed swiftly and diligently, loan defaults can lead to insolvency and the eventual shutdown of a thriving business.
As a result, finding ways to get out of debt is a critical aspect of a company’s survival. Here are some steps you can take when faced with bank defaults:
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, a cash flow mismatch.
Therefore, the first step is to create a financial model that shows the minimum cash you can generate periodically to be able to repay debts as and when due.
This information is critical for restructuring your loans.
Develop a Business Plan: If your business is encountering difficulty in repaying loans because revenues are decreasing, your initial efforts should be directed at ensuring the survival of your business.
Tough decisions may have to be taken in the course of doing this, provided it is in the best interest of the company.
Identify Potential Sources of Repayment: Make a list of various sources of repaying the loans other than from the cash flow the business is generating.
It could be through the sale of assets, raising fresh equity, or even getting a debt pardon.
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.
These are incremental cash inflows that can help reduce the loans significantly and assist in achieving a restructuring.
Commence Negotiations with Your Bank: When in default, it is important to remember that banks may consider a mutually beneficial solution provided it is logical.
As such, you must offer a concise plan that clearly shows how you intend to pay back the loan.
The intention shown to the bank is a clear indication that you are willing to repay the loan.
However, it is important to note that your plans must not only be logical but also reasonable and feasible.
You cannot ask the bank to grant you 20 years 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 when you call on your economic capital and call favours from people who can assist in your negotiations
Explore Refinancing Options: Whilst negotiating with your bank, efforts should also be directed towards identifying options for 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 more favorable terms.
You can approach institutions such as the Bank of Industry and Nexim Bank to help refinance local debts that have punitive interest rates.
Obtain Debt Restructuring Facility: Whilst exploring other forms of refinancing, ensure that you complete the debt restructuring as soon as possible.
This is important as it saves time, gives your entire debt repayment plan a focus, and helps stop punitive charges arising from frequent defaults.
You should set a timeline for this stage that should take no more than two months from the time you commence negotiations with your bank.
Remain Modest – You must also perform some self-introspection, be modest and stop displaying any form of wealth.
You don’t want to be seen living a very luxurious lifestyle whilst trying to sort out bad debts.
During the economic crisis of 2008, some bankers on 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, the press, and the public at large.
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 during this period as various challenges will arise 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.
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 they start to get better. This may mean defaulting further on loan repayments, threatening to jeopardize the survival of your company.
To avoid this, make sure you at least make loan repayments such that it covers 90 days of 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.