With COVID-19 cases continuing to surge in the United States and small business defaults rising sharply, U.S. commercial lenders can mitigate their risks through a range of loan portfolio risk management strategies to weather economic headwinds and promote long-term growth. That’s according to Wolters Kluwer Lien Solutions in a new thought leadership article published in the American Bankers Association’s (ABA) Banking Journal.
While economic stimulus programs have been enacted, funding from some of those efforts is beginning to dry out, leaving small businesses in a precarious situation. But in spite of significant volatility in today’s commercial lending space, there are ways for lenders to mitigate the risks, notes Raja Sengupta, Executive Vice President and General Manager, Lien Solutions, in this feature article, “Navigating a New Era in Commercial Lending.”
“A thorough review of loan documents is necessary to determine to what extent borrowers may be, or are likely to become, in default of financial covenants or in breach of representations and warranties or other covenants, or are required to provide notice to their lenders of their current or anticipated circumstances,” writes Sengupta. “Further emphasis should be placed upon secured loans, to ensure that liens are perfected and that the collateral can be secured.”
Sengupta notes that for cash-strapped businesses facing a potentially prolonged period of reduced demand, bankruptcy “may be an attractive route to managing their debt burden. Lenders thus face a delicate balancing act between leniency and stringency for borrowers in distress.”
He writes that strong rigor around workouts can benefit both borrower and lender as a valuable way to mitigate a wave of defaults. But not all circumstances necessitate a workout, and the practice should be employed only when necessary, such as when the borrower’s prospects in the future look bright and they are receptive to negotiations.
“Lenders can build stronger relationships during volatile times by offering resources for borrowers to take advantage of, such as networking or federal loan assistance, Sengupta notes. “There are many ways to keep borrowers afloat until they recover. It’s well worth their time to explore all of the available options.”
First published in 1908, the ABA Banking Journal—the American Bankers Association’s flagship magazine—provides insights that help banking leaders succeed in the competitive financial services market. It is read by more than 20,000 bank leaders nationwide.