Since 1988 more than 635 institutions insured by the Federal Deposit Insurance Corp. (FDIC) have been shut down, sending thousands of borrowers into a frenzy. Forget panic -- if you really want to weather this storm, here are some first steps to take:
* Study all your loan agreements to verify compliance. The goal of the FDIC once its people arrive isn't to be your banker but to get cashed out as rapidly as possible. "Your objective," says Ken Smith, president of Massachusetts Business Development, in Boston, "especially if you're a small borrower, is to ensure that it happens on your terms." Once regulators are in the bank, plan on being held accountable for every letter of your loan agreements -- even fine print your former lending officer shrugged off. Check, too, to see that the loans are actually written the way you think they are. Many long-term mortgages, offers John Troop, a business consultant in Tulsa, are in fact written as five-year notes with balloon payments at the end.
* Get a good lawyer. As long as you're in compliance, neither the FDIC nor the bank that might buy your loans has a legal right to alter the terms. On term loans, your best strategy may be to sit tight. Working-capital loans, however, are more precarious. Don't be surprised if regulators look for ways to wind down credit lines fast -- going so far as to seize deposits and collateral to pay off debts. Since hardball tactics like those can impair your ability to meet basic obligations (such as payroll) and can raise liability questions, get experienced legal advice right away to sort out what you have to do legally from what the regulators say you have to do.
* Set up a new checking account at another bank. Some credit lines have terms that prohibit a borrower from diverting cash collections into accounts at other banks. If yours doesn't, begin moving money to another bank at once. Otherwise, you're liable to run out of cash, and you may not be able to meet payroll or pay suppliers.
* Get to work finding a new credit source. If you're lucky, you'll be able to get a little breathing room from the FDIC or the new bank that's entered the scene. Don't count on much. "Within a matter of days, you should have a complete package of information about your company to bring to other sources," advises Troop. But what if no one snaps at the business? Will the new guys really pull the plug? They might, Smith says, "but if you can demonstrate that you're making a good-faith effort, and you keep communicating the steps you're taking to find other sources of money, they're apt to work with you. In some cases, I've even seen them agree to term out working-capital loans by turning them from demand loans into short-term loans. But those are the exceptions."
-- Bruce G. Posner* * *
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