Engage with the bank or other financiers
A business may find itself in dire straits due to the need to repay deferred taxes or NOW, non-performing business units, declining profits or the departure of a major customer. In such a situation, it is wise to sit down early with your bank or lender about refinancing options.
Refinancing
Can existing financing be supplemented with a new loan or credit extension? Can a credit facility be converted to a suitable loan with a lower interest rate? Check with your bank about refinancing options and see what banking products are necessary and whether fees and terms can be adjusted.
Other funders
If the bank is not willing to refinance or the terms are not appropriate, another lender can be sought. That may be another bank, but there are more forms of financing such as real estate financing, asset financing, crowdfunding, informal investors, and there are financiers other than banks. It may pay to explore non-bank financing options to avoid imminent bankruptcy.
Risks
Permission
A new lender can take over the existing financing and expand it at the same time or only take care of the expansion of the financing(step financing). With the latter - a new party finances the expansion - it must be checked whether this is allowed by the existing/first lender and whether the latter must, for example, give permission for providing collateral to the new lender. If the conditions of the first bank are not met during refinancing, this can be grounds for termination of the financing.
Recovery risk
Another risk when refinancing or providing additional collateral, is that the other creditors may accuse the borrower/debtor that their recourse position has been adversely affected by the refinancing (paulian action) or that this is unlawful. For a bank this risk is less, but this risk in refinancing must be kept in mind.
Terms
The financial aspects when refinancing or expanding are important: is a loan with a lower interest rate possible, is the mark-up rate not too high, can the closing costs or annual handling fees be reduced?
What is often overlooked are the conditions associated with refinancing. Does the bank want more collateral or must more information be provided? Consideration should be given to whether the terms of the refinancing combined with the collateral are appropriate.
If the existing securities, such as pledge and mortgage rights, surety bonds or joint and several liability, have sufficient collateral value, the question is whether an extension of the securities should be agreed to. If, for example, a pledge on savings is then requested, this could mean liquidity problems while the banking position does not require this. Even when requesting a security deposit from the DGA in private in order to get 'skin in the game', it must be assessed whether this is strictly necessary. Partly in the context of the bank's special duty of care, too much collateral should not be requested from a customer.
