Helping Small Businesses Before It’s Too Late

Even with small business optimism ticking up slightly, many Main Street borrowers remain financially fragile. High interest rates, inflation, and tighter consumer spending are still taking a toll—without the safety net of pandemic-era stimulus. In a recent BAI Banking Strategies article, Dilworth Paxson LLP Partner Jennifer Maleski laid out the case for proactive loan management strategies that can help banks preserve relationships with small and medium-sized businesses (SMBs) while minimizing losses. 

Spot the Trouble Early 

The sooner a bank sees the signs of distress, the better the chance of protecting both the borrower and the bank’s balance sheet. Red flags include: 

• Constant reliance on credit lines without periodic principal reductions 

• Consistently late or missed payments 

• Frequent overdrafts in deposit accounts 

• Budgets showing reduced cash flow 

• Shrinking cash reserves 

• Financial covenant defaults 

• Unusual account activity suggesting reliance on high-risk financing (for example, large cash infusions from new debt or daily/weekly payments indicative of a merchant cash advance) 

“Early monitoring and engagement when signs of risk first appear will allow banks to discuss solutions with their borrowers,” wrote Maleski, whose work focuses on commercial workouts, including loan modification, bankruptcy, and litigation. 

Choose Flexibility First 

Enforcing every technical default in this environment can backfire. Maleski encourages lenders to consider short-term relief: deferments, interest-only payments, or covenant forbearance. These temporary lifelines may help borrowers stabilize without pushing them toward even riskier alternatives. 

Another tool: “quiet restructurings.” These out-of-court agreements—such as extending maturities or adjusting covenants—can be more practical than bankruptcy, which is often too costly or disruptive for small businesses. 

Encourage Outside Help 

Many distressed SMBs would benefit from financial or turnaround consultants. Banks can make temporary relief contingent on borrowers bringing in outside experts to help with budgeting, operations, or restructuring. 

Strengthen or Exit—But Do It Thoughtfully 

If the relationship still makes sense, banks may want to modify the loan or even extend additional credit if they’re comfortably oversecured. If not, short-term extensions, discounted payoffs, or structured repayments may offer a cleaner exit. 

In either case, the key is acting before a business collapses under the weight of its debt. “Proactive loan management through temporary or permanent modifications may increase the bank’s chances for repayment of existing obligations and preserve the relationship for future transactions,” Maleski said. 

In other words: Don’t wait for a crisis. Get ahead of it. 

Further Reading 
Delivering What Small-Business Banking Demands 
Helping Borrowers Help Themselves: The Case for Turnaround Consultants 
Building and Boosting Your Bank’s Workout Team and Capabilities 
A Banker’s Guide to the Bankruptcy Code’s New Subchapter V