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.
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
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.
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 would like to know more about how your business can secure the funding it needs, visit US Capital Partners, Inc. at http://www.uscapitalpartners.net/ or call (415) 882-7160.