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The First 5 Steps in a Problem Loan: Preparing to Talk

The biggest mistake in payment difficulty is delaying contact with the bank, or going into the meeting without a plan. The first five steps are about clarifying the financial picture and putting the options on the table early.

Difficulty in servicing debt rarely arises in a single day. Lengthening collection periods, falling profitability, growing inventory, currency or interest rate moves, or an investment not generating the cash expected all erode liquidity over time. At that stage the most important thing is to open communication with the bank before the problem grows and while the data set is ready.

1. Produce the 13-week cash picture

The first task is not to revise the annual budget but to see where cash runs out over the coming weeks. Opening cash, customer collections, critical suppliers, wages, tax and financing payments should be listed on a weekly basis. Without knowing the date and size of the cash gap, the size of a restructuring request cannot be set.

2. Bring every debt onto one map

Bank loans, leasing, factoring, supplier balances, tax liabilities and other financial debt should appear in one table with currency, interest, tenor, collateral, covenants and instalment details. Fragmented data leads to the wrong priorities.

3. Calculate the sustainable cash capacity of the business

The purpose of a restructuring is not simply to defer today's instalment. The new payment plan has to be consistent with the cash the business can genuinely generate. DSCR and the minimum cash level should be calculated under base, downside and stress scenarios.

4. Take a “credit file” to the bank, not a “request”

• Three years of financial statements and the latest interim accounts.
• A 13-week cash flow plus a 12–24 month projection.
• The debt and collateral map.
• A short executive summary explaining the source of the problem and management's actions.
• Alternative restructuring scenarios: tenor, grace period, amortisation profile, additional collateral or an equity contribution.

5. Set your negotiating limits in advance

Going into a bank meeting without knowing which payment plan is genuinely sustainable can produce a structure that brings relief in the short term and breaks down again a few months later. Acceptable debt service, minimum working capital, critical supplier payments and investment needs have to be weighed together.

Understanding the bank's perspective

For the bank the basic question is wider than whether the customer has a problem today: is the problem temporary or structural, does management produce reliable data, can the company regain repayment capacity, and what is the chance the new plan fails? A company that answers those questions clearly and numerically moves the negotiation onto more rational ground.

Time is a valuable asset in a problem loan. Early preparation creates more financing options and more controlled negotiating space. Delay narrows the options and forces decisions under crisis pressure.

Official sources and further reading

• EBA — Guidelines on management of non-performing and forborne exposures
• EBA — Guidelines on loan origination and monitoring