What to Do If the Bank is About to Call Your Business Loan
As a direct lending and advisory firm, we see a lot of cases of clients who come to us because the bank is about to call their loan.
The first things that need to be recognized in time of financial crisis are how to measure the risk of your bank calling your small-business loan, and what to do if you need refinancing.
As a result of the sluggish and uncertain economic recovery, many businesses are in danger of losing their bank loans. Loans can be pulled for a number of reasons, but the most common are either poor financial performance by your business or your bank’s own credit problems. The latter can lead a bank to begin taking less risk and reduce loan balances. Unfortunately, your bank will generally not tell you your loan will be “called,” or will not be renewed, until right before it takes action.
How can you assess if your business is being considered for termination?
Essentially, there are two categories of assessment when measuring the risk of losing your business financing:
1. the type of loans your company has and
2. your company’s financial performance
Loan Type Criteria
The type of bank loans your company has are categorized below (from riskiest, and currently least popular with the banks, to safest and most popular for the banks to hold).
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.
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 of 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? 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).
What to Do If You Need Refinancing
If you are at moderate or great risk of having your bank loans pulled or not renewed, what should you do?
The answer is “shop your loan,” or have a professional shop it for you.
In the current climate, it is nearly impossible to find another bank to take over your loan if your current bank wants you to exit. So walking up and down the street to shop your loan will not be productive. Where else can you turn? The answer is alternative lenders.
However, alternative lending in the small-business lending world is fragmented and difficult to navigate. Few lenders will make one loan on all the assets of a company. Usually, each alternative lender specializes in a certain asset class. You are therefore left with the problem of having three or four new lenders, each with different terms and pricing, lending on different collateral. Coordinating this “circus” of lenders can be difficult, frustrating, and time-consuming for any small-business CEO or CFO.
Finding the Right Adviser to Help You
A smart alternative is to spend time finding an experienced third-party adviser to smaller businesses. The ideal adviser will be a small-cap investment banker specializing in restructuring that knows the small business alternative lending market and can structure a deal between multiple lenders. Such an adviser will need to have excellent contacts and relationships with appropriate lenders, and will have experience in the same size and sector as your company. It is helpful, of course, if the adviser is able to provide financing also.
At US Capital Partners, we are both a direct lender and offer specialist advisory services. We can advise on how to deal with a hostile bank, how to resolve lender issues, or how to refinance in distress situations. As a direct lender, we are well-positioned to negotiate on your behalf with your current lenders. Our ability to engineer optimal financing solutions for smaller businesses has made us one of the most innovative small to middle market investment banks in the country.
If you think your bank loan might be pulled or not renewed, contact us at (415) 889-1010 or visit www.uscapitalpartners.net.