Refinancing Non-Performing Assets (NPA) Before End of Year

As we approach the end of the year, I would like to make all small businesses and real estate developers aware that there is an opportunity that exists that all of you should try and take advantage of before the calendar has been completed. If your company or entity has an outstanding commercial loan(s) that is either a classified loan or a non-performing asset (NPA) with a bank and is in the bank’s “workout department”, you may have an opportunity to refinance this loan with an alternative lender and obtain a discounted payoff from the bank that is holding the loan in their portfolio. The reason that this opportunity exists is because every bank wants to “pretty up” their balance sheet before the end of year so that their Call Report numbers look more favorable when they are released as public information by the early part of the following year.

In order to achieve this goal, banks need to jettison as many classified or NPA’s as possible from their balance sheet. By making deals with some of their borrowers in which the bank “takes a haircut” on an existing loan(s), the bank can shed a troublesome credit from their loan portfolio. Not only does the bank free of some of their cash that can now be reinvested in a new performing loan, but the the bank will also reduce their labor costs of their “Special Assets” or “Bank Workout Department” since that will be one less difficult loan that that department will need to work on. In addition, banks are forced to put money in their Loan Loss Reserve (LLR) to account for all classified or NPA’s. By getting rid of one of these loans (even at a discount), the bank can then take capital out of their LLR and put it back to work for general capital purposes and earn a return on that capital.

The “upshot” for a small business borrower is that it needs to locate both an alternative lender who might be able to lend them the money to pay off the bank and they need to retain the services of a bank workout specialist who has expertise in negotiating these settlements.

This scenario is clearly a “win win” for both the borrower and the bank since both parties are able to achieve mutually beneficial goals before the end of the calendar year.