Business Loan Risk Assessment: How to Measure the Risk of Your Bank Calling Your Small-Business Loan

As a result of the recent “Great Recession,” many small businesses are finding it difficult to obtain credit. Additionally, business owners need to be aware that many companies are also be in danger of losing their current bank loans.

I recently blogged about the importance of protecting your small business financing by knowing if your business is in danger of losing it's financing. But how can you assess if your business is being considered for termination? There are a few fundamental and relatively simple questions you can ask yourself to determine your risk of losing your small business loans.

Essentially, there are two categories of assessment when measuring the risk of losing your small business financing: the type of loans your company has and your company’s financial performance.

Loan type criteria
The type of bank loans your company are categorized below from riskiest, and currently least popular with the banks, to safest and most popular for the banks to hold.

Considered riskiest, and therefore least popular, is a combination of the following types of lending to one business from the same bank:

1. Real Estate: A commercial real estate term loan for your place of business

2. Machinery and Equipment: A term loan on machinery and equipment used for your business

3. Inventory: A revolving line of credit tied to your inventory balances

4. Accounts Receivable: A revolving line of credit tied to your accounts receivable balances

If your business has all four of these types of loans in place, all from the same bank, you are at the greatest risk of losing all or part of your financing. Banks are reluctant now to make all of these types of loans to a single client. They would usually welcome the opportunity to get out of loans with this breadth of exposure.

As you eliminate loans on real estate through accounts receivable, your perceived risk to the bank declines. It is possible your bank will be happy to keep your credit in place with all these loans in place if your financial performance is as good as, or better than, it was last year. But a word off caution: if your bank has had unusually high loan losses, is financially weak, or has recently been taken over by another institution, it may call your loans even if your company is strong.

Company performance criteria

How was your company’s financial performance over the past twelve months? If there has been a decline in financial results or a drop in company asset values, you may be at risk of losing your small business loans.

The following financial problems are considered most damaging to your business’s prospects of keeping its bank loans:

1. Less accounts receivable and/or inventory assets than agreed as the “borrowing base” required for the revolving line of credit amount currently outstanding

2. Insufficient trailing and projected cash flow to make debt service

3. Net operating losses for the current reporting period

4. A top-line sales decline from last year to this year

5. Fixed-asset devaluation below the agreed loan-to-value ratio (i.e. your building is worth much less than when you got your bank loan on it).

If you think you may be at great risk of having your small business loan pulled or not renewed, it's time to shop your loan or have a professional shop it for you – if you want to continue to have working capital for your business.  

If you would like to know more about how your business can secure the funding it needs, visit US Capital Partners, Inc. at or call (415) 882-7160.