As interest rates and operating costs remain high, more commercial borrowers are showing signs of financial stress. For community and regional banks, a well-managed loan workout can preserve both the customer relationship and the bank’s legal rights.
Early Identification Matters
The best workouts begin before a formal default. Warning signs—missed reporting deadlines, slow or missed payments, declining collateral values—should trigger an internal review by the bank. Lenders benefit from acting early considering informal forbearance discussions can often resolve short-term issues without triggering legal enforcement processes.
Document Everything
If a forbearance or modification is warranted, documentation is key. Every agreement should clearly describe existing defaults, outline the temporary relief being granted, and reaffirm the borrower’s obligations pursuant to the underlying loan documents. Banks should avoid relying on verbal discussions, email exchanges, or unsigned term sheets; under South Dakota law, informal promises may create enforceability risks or inadvertently waive the bank’s rights or remedies in the event of default.
Protect the Collateral Position
Before agreeing to new terms, confirm that all collateral filings and documents are current. Check UCC-1 financing statements for lapsed filings and ensure mortgages have been properly recorded and, if relevant, that all collateral real estate mortgages have been renewed. When multiple creditors are involved, an intercreditor or subordination agreement may be necessary to protect lien priority.
Consider the Exit Strategy
A workout is not always a long-term fix. Banks should identify potential exit options—refinancing, collateral liquidation, or structured repayment—before extending additional credit. If the borrower’s condition continues to deteriorate, having a well-documented record of good-faith efforts can support the bank’s position in foreclosure or bankruptcy proceedings.
Relationship and Reputation
Finally, remember that a workout is as much about business judgment as protecting the bank’s legal options. Many South Dakota lenders rely on long-standing relationships in close-knit markets. Transparent communication and fair dealing during the restructuring process can preserve those ties and demonstrate the bank’s commitment to practical problem-solving.
In today’s uncertain economic environment, a disciplined approach to commercial loan workouts—grounded in thorough documentation, clear communication, and timely action—can turn potential losses into managed outcomes.
Contact a Davenport Evans lawyer at 605-336-2880, [email protected], or find a specific attorney on our Our Lawyers page.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.