An old adage in the credit granting business holds that "if you're not taking some losses, you're not extending enough credit." That is probably true. However, being in business isn't about maximizing losses.

Before we can get to loss realization, though, we have to go through the default process.

What is a default? Simply put, it is the failure to perform a requirement as contracted. If not
cured, it becomes a continuing default and the longer it continues the more severe it becomes.
It may be easiest to think of it in two ways...monetary or performance default and technical or
compliance default. Of the two, monetary default is clearly the most potentially damaging.
However, in many cases the monetary default is set up by the technical default. Fiscal
performance targets aren't hit, loan agreement term covenants are violated, or other technical or
compliance abrogations occur. These things happen for reasons almost all of which lead directly
back to poor fiscal performance which is the first step toward ultimate monetary default and
possible loss.

How do creditors handle these defaults. There are many ways, but for now, it is safe to say that at minimum the warmth in the relationship will cool. The question becomes how rapidly and how far gone is the loan when cooling is complete.

It is important to get to a resolution strategy established while the borrower still has some
capacity to generate repayment. The importance of getting to a resolution fairly quickly
emphasizes the need of keeping all communications open, and to the degree possible, impersonal. Discussions should be confined to facts, and that is often easier said than done in a
one-side-against-the-other atmosphere. Blame can frequently be placed on both sides of the
dispute. Unwillingness to recognize that fact can impair the resolution process.

Defaulted loans can end by being very expensive for both sides. If a satisfactory resolution cannot be determined, litigation and bankruptcy can follow. In either case, the potential for loss
to the creditor increases.