Share
Explore BrainMass

Smith: Negotiating with Banks

Mike Smith seeks your counsel about a problem that has grown out of a decision he made three years earlier to buy a warehouse. Up until then, he had rented three warehouses, where he stored containers and did pick-and-pack for retailers importing goods from abroad. Figuring it was time to consolidate; Smith found a building, negotiated a price of $3.5 million, put down $300,000 and borrowed 3.2 million from a bank at 7 percent interest. It seemed like a good idea at the time. Then a recession hit. As his sales dropped, he struggled to make his monthly payment of $27,000. At present, he's behind in his payments and scared. Furthermore, the situation seems unlikely to improve anytime soon. To make matters worse, he signed a personal guarantee on the loan and thinks he might lose his house. The bank is assessing the situation to decide what to do.
In his panicked state of mind, Smith has come up with a plan. "I'm going to tell the bank that I need eight more months", he says. "It can take the money I'll owe for that time, plus what I owe now, and tack it onto the end of the mortgage. What do you think?"
"How do you know that's what the bank is looking for?" you ask. "Well, obviously they want the money I owe, but I can't pay them," Smith says. "I have to offer them something. My wife and I could lose everything!" "You aren't going to lose everything," you say, "and you're making a mistake to assume that you know what the bank wants."
Question 1. What guidance will you give Smith in negotiating with the bank?
Question 2. Why might you advise him not to go into a meeting with bank officers with a plan already in mind?

Solution Preview

1. I would suggest Smith make an appointment with the bank. Prior to the meeting, Smith should brainstorm and prioritize potential solutions to his situation. He should rank these, based upon his priorities. In addition, it would be wise to discuss the situation with ...

Solution Summary

This solution is based upon a scenario about Mike Smith who is unable to meet his financial commitment to the bank. It discusses the following questions:
What guidance will you give Smith in negotiating with the bank?
Why might you advise him not to go into a meeting with bank officers with a plan already in mind?

$2.19