Should I Contact My Lender When Going Into Default?

For businesses with lines of credit or term loans, these times can bring a lot of uncertainty. You may find yourself wondering if you can stay in compliance with the terms of your credit facility, given the way your business results are trending. What should you do if you are headed for a default?

First, don’t panic. Second, know that you do have the ability to negotiate even in a default situation. Third, don’t put your head in the sand. This is important. You maximize your ability to negotiate good terms the sooner you get out in front of the situation.

One good step in the process might be to reach out to the lender early. Though the temptation to hide the ball may be great, you might not want to do that. Talking to the lender early could win you good will from the lender when you’re likely to need it the most. It also shows the lender that you are proactive in solving problems, and can give you a better negotiating position than if you wait.

That being said, I don’t recommend doing anything without first talking to your legal counsel. Definitely call your lawyer first and strategize, working through the issues privately and deciding on the best course of action for your situation.

After you’ve obtained good legal advice, you may decide to talk to the lender. You’ll want to tell them what is going on and what you expect will happen. You might tell them your plans for turning things around. Let them know your timeframe for turnaround. Then see what you can negotiate. This depends on what kind of default you are anticipating. It may be that a financial covenant breach can be renegotiated to provide a larger cushion. Payment defaults are tougher – but can you agree to at least make smaller payments over a short period of time until you get back on track, and then pay more? Meanwhile, can you provide additional collateral or guarantees? What can you give up in exchange for what you are asking the lender for?

Meeting the lender with a solid plan for turnaround in hand – and a solid plan for negotiating a fair exchange – will make a mutually beneficial outcome much more likely.