By Theodore J. Hamilton, Esq
Have you ever thought it would be nice never to have to hire an attorney to collect on a bad loan? Never to have to deal with collection issues at all. Well, this might be possible, if you never made a loan. Otherwise, no matter what you do, you face a certain percentage of your loan portfolio going bad and heading to collections. There are, however, a few steps you can take to ensure most of your loans stay on the positive side of your balance sheet.
The first step is a basic one. Make sure you document your loans properly. Make sure you file the UCC-1 or a mortgage to perfect your security interest. If the loan involves other types of collateral such as a liquor license or automobile, make sure you either hold the title or record the lien as required in the state where you operate. If it is a construction loan, make sure that all subcontractors are paid before you disburse. Finally, make sure you get the correct corporation to sign the loan. Ensure the name of the borrower matches with the corporate records filed with the secretary of state and obtain an affidavit to this effect. Finally, get guarantees. A loan without guarantees, especially to a small business, will not be paid when things go bad with the company.
Secondly, know who you are dealing with. Our firm receives so many bad loans where the lender has no personal relationship with the borrowers. Knowing who you are dealing with at the outset is very helpful. Go see the location where they operate. How long have they been in operation? If it is a short period of time, find out the prior business of the principals. If they rent, talk to their landlord. Ensure they are current on their rent and have not been late. Before you make the loan, get a chance to learn about the borrower’s business. Ensure you have up to date financials. This includes completed balance sheets and income statements. If you are relying on receivables, review monthly receivables reports and compare them month to month. Review the financials for at least a 2 year period prior to the current date. Ask questions of the owners and the CFO relating to the balance sheet, income statement and receivables report. This type of question and answer period can be very helpful in determining the potential success or failure of the business. You also need to check the public records. Search the Secretary of State for other corporations owned by the borrower. Check the clerk of the court where the borrower resides for any filings. Check bankruptcy filings as well as a precaution. As President Reagan said of the Russians; “Trust but Verify”. With this mantra, you will ensure that the statements made on the application and by the borrower are accurate.
Third, go with your gut. How many times have you said, I could see this one coming. Closing the loan may not be worth the hassle, if in 6 months it goes bad and you have to spend your time dealing with a bad loan.
Finally, don’t wait to get the file to your attorney if it is going bad. If the loan documents were not created by an attorney, get them to your attorney to review when it does go bad. The attorney can ensure your documents are in order so when you sue, everything is ready. The attorney can also assist in creating loan forbearance documents that deal with many of the defenses raised and eliminate them should suit be necessary.
Good luck and may your loans all be paid in full.
Theodore (Ted) J. Hamilton is a principal with Wetherington, Hamilton & Harrison, P.A. in Tampa, Florida.