There is little stress on projects or ventures during periods of low inflation and low interest rates. This condition can help hide flaws and weaknesses in a project or venture. As rates rise, which is an indication of impending higher inflation, the viability of leveraged ventures will be tested.

Coming off of a period of easy credit, competitive markets, and pressures to produce more loans and increase business, the clouds of a perfect storm are gathering to set the stage for another period of troubled debts.

For the past year, banks/lenders have enjoyed very low delinquencies and foreclosures. This environment creates a craving for more and more new business to deploy capital. This lust after deals, that lenders should not do, in markets where they should not be, will create sloppy lending practices.

The profit margins of a lender are rather slim, so the impact of a delinquent loan can have a huge impact on profitability. When a loan goes bad and a lender experiences loss of income and has additional legal fees, and other costs of collection, it takes a substantial amount of new business to offset those costs. Suffice it to say that if a lender were to charge off say 30-40% of a troubled loan, it would more than offset any potential income from that transaction and many others that were booked.

It is often difficult to anticipate and then accept the fact that business plans are not materializing in a positive way. When the tide changes, borrowers must be a step ahead and be willing to recognize potential issues before they become problems; take proactive actions to communicate to their lender(s); present resolutions; and, cooperate. The borrower/lender relationship is vital to a successful outcome but can become contentious. It should be viewed as a partnership. When things go bad, it is important to maintain an open relationship to help produce the most positive outcome.

To learn more, check out Sam's course Managing Troubled Debt.

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Author Sam Jones is an experienced finance executive responsible for multiple real estate properties throughout North America, who authored a text book on Real Estate Finance and was certified as an instructor by the PA Real Estate Commission.