Loan negotiation for business owners
By Ed Morrow
Intl. Assoc. of Registered Financial Consultants
When a financial consultant identifies that a business entity has a loan that is currently not insured for cancellation upon death, there are numerous important considerations.
Client’s desired objective
It is possible that the CEO of the enterprise does not care if the loan is cancelled upon death. There may be sufficient uncommitted liquid assets to fund the repayment. This is not often the case, but it is the first evaluation to be made. If the business leadership is not concerned with this loan repayment issue, then the financial consulting service should go on to other matters such as:
- succession plan structure and funding
- retention and incentive compensation plans
- family estate equalization
- key executive retirement income
Insurability of the loan guarantor
Is this person insurable even though perhaps slightly rated? If not, would it be appropriate to insure the spouse? What about insuring another key executive? If the answer to any of these three queries is “yes,” then you would normally proceed with attempting to negotiate a loan modification.
Modification, not a new loan
Consultants find that the discussion with lenders will proceed much more easily if this is considered as a modification of the current loan, rather than a new loan.
This would avoid going through new loan assessment, credit checking and all the categories considered by the lender. Remember, at this point you are not requesting any more cash from the lender, just slight modifications going forward.
Are loan payments current?
This is very important. If they have recently lagged a little, it may be wiser to proceed with other business evaluations and arrange to meet the next scheduled payments a bit early. The first thing the loan officer will do, when approached for a loan modification, is to review the most recent payment history.
You need direction from the CEO
There are important advantages in your meeting privately with the lender. He or she might tell you about special reservations that might exist regarding the borrower – which are serious (but undiscussed) issues. If your negotiation is not successful, if you have been gracious to the loan officer, you will not have damaged the relationship, even if the answer to the request for loan modification is “no."
You need authorization
The lender will not discuss the client’s loan details without an authorization. This does not have to be a complex document. But the client’s signature is required, and it would be a good idea to staple the CEO’s business card to the form, because a loan officer may feel it is necessary to receive a verbal assurance. Steps to be taken
Start with a phone call
Call the lender and get connected with the appropriate officer. This call is a courtesy gesture. You do not want to arrive unscheduled, and with no opportunity for the lender to examine the loan file and payment record.
Mr. Loan Officer, this is _________ and I am the financial consultant for Mr. ________, who is the __________ and CEO of ______________. As you will recall, that firm borrowed $_________ from your institution on ______. Things are going well for the business, and they have authorized me to discuss some ways to strengthen your loan. Naturally, you will want a copy of our authorization form, which I will send to you today. When would be a convenient time for us to get together for about a half hour?
Send a short courtesy letter
This should be on your stationery, and should note on the bottom that a copy has been sent to the business executive.
Enclosed is the authorization form for our discussion of the loan your organization has with _______________. I have also stapled a business card for the CEO, ________________, to the form.
I am looking forward to meeting with you for about half an hour to discuss some ideas we have to improve this loan by adding additional collateral. Perhaps you can have a summary of the original loan terms or agreement for our meeting, which is scheduled for __________ at _____.
Even though you might not discuss all your recommendations, you will feel far more confident if you have already analyzed the loan modification options.
1. First, you should confirm the original terms of the loan and the interest rate that is currently being charged (which is probably an adjustable rate). You need this data. Chart the amount and timing of future principal repayment. Project when the loan would be fully repaid.
2. Determine the premium amount (at the frequencies to match the loan) for a high early cash value life insurance policy. If you plan to recommend a critical illness policy as well, then obtain a current quote for a separate policy or a rider to the new whole life policy. If the stand alone CI premium is not a lot higher, then a separate policy is better.
3. Remember, a reduction in the loan interest rate would be nice, but this is not your true objective. In fact, the client could even agree to a very slight increase in the rate, provided the amortization period is extended. It is the amortization change that generates the desired cash flow.
4. What extension of amortization is needed? This will depend on three things: the current loan balance, the premium required to cover the insurance required and the reduced payment amount based on the extension you are requesting.
5. What financial collateral will be accumulated within the permanent life policy?
6. Review the insurance company’s policy collateral assignment form so you can easily demonstrate that the lender would be the primary recipient in the event of a death, and that the cash values are similarly assigned to provide additional protection for the lender.
7. Explain to the lender that an assignment requires the insurance carrier to notify the assignee of any default in premium payment or request for withdrawal or surrender, which could not take place without the lender’s concurrence. Move slowly in the lender interview
Do not assume the lender understands a policy assignment and that cash values will provide additional security. By adding the life insurance, you are substantially reducing the risk assumed by the lender.
Very lightly touch on future loans
You do not want the lender to believe that another loan request is coming soon. This would make them nervous. You might say something like: “Nearly all growing companies need additional capital as they expand. By our establishing and growing this collateral cash value account, we will be making it easier for you to respond to subsequent requests.”
Prepare your numbers on a single page
Keep all of this as simple as possible. Do not give the lender a 60-page insurance illustration. The lender is not the purchaser, merely the beneficiary (see illustration at the end).
Immediately call the client
The business owner will want to know how the meeting went. Naturally, you should take good notes during the interview, and be in a position to send the client a written summary of the interview.
Death benefit amount
You noticed in the numbers in the illustration at the end that the face amount is equal to the original loan balance. Yes, you could reduce it, but with the original amount fully insured, the client is ready should a future loan increase be an appropriate request.
If all has gone well and the lender is looking favorably toward your suggestion, this will probably need to be approved by a loan committee, and you should tell the client not to expect action for a week or two. In the meantime, arrange for a physical exam.
Request a policy with permanent coverage equal to the original loan balance and ask for an equal amount of additional term coverage for other needs.
It is extremely important that you follow through on getting the insurance company’s collateral assignment form executed and verify that the insurer has recorded the action.
At the end of each policy year, it would be nice to notify the lender and the insured that the cash collateral has been increasing. This positions you to assist in the next round of loan negotiation, which might involve additional service fees and insurance funding. While you are seeking a loan amortization extension to guarantee the cash flow to fund the insurance coverage if the lender is not willing to do so, remember that the client may still want this to be accomplished, and can find the funds elsewhere within the firm.
Be sure to thank the lender
Even if your negotiation for this client does not reach a successful conclusion, it is important for you to continue an effective and cordial relationship. You might be offered the opportunity to extend your services to other clients of the lender.
A responsive lender (loan officer) may be in a good position to recommend your services to other clients of the institution, so you should cultivate this relationship.
Look for local prospects
In your area, there are probably several magazines, tabloids association or civic newsletters that profile successful local businesses. Chances are, they have loans that need to be protected. Give them a call or send a letter offering to help them develop a loan cancellation plan.
|Loan Modification Illustration|
|Original Amount of the Loan Principal:||1,000,000|
|Original Amount of the Loan Period:||5 Years|
|Current Loan Balance Outstanding:||800,000|
|Current Loan Principal Repayment:||200,000|
|Modification of Amortization Period to:||6 years||5 Years|
|Revised Principal Payment Amount:||133,330||160,000|
|Cash Flow Improvement to Borrower:||66,670||40,000|
|Life Insurance 1,000,000 ($35 per $1,000):||35,000||35,000|
|Cost for Critical Illness Coverage:||4,000||4,000|
|Net Cash Flow Improvement:||27,670||1,000|
|Additional Death Benefit for the Business:||200,000+||200,000+|