Take My Loan ? Please
What to do when your banker gives you the heave-ho
Your bank has just notified you that it will not be renewing your line of credit or loan when it matures. What do you do now? How do you begin finding a new bank without appearing desperate? It's not the easiest process in the world, but if you take the correct steps, the transition should go smoothly enough.
If you get the news by phone, simply say that you would like to receive a formal notice and explanation in writing, then end the conversation by saying you hope things can be worked out. Granted, it would be easy to let your emotions get the better of you after such a notification, but don't let it happen. Your banker, who might seem to be your worst enemy, can still be a valuable ally. If you maintain a friendly dialogue, your banker is more likely to postpone taking serious legal action and may even be helpful in finding new financing for your company.
There are many reasons why your banker might ask you to find a new bank. (See "Why Banks Say No," below.) The most common are covenant violations or poor financial performance. On the other hand, you could be just as conscientious as the next borrower and still not please your banker. Perhaps the bank just plain loses money on your account or does not achieve the return it had planned on.
Whatever the reason behind the bank's decision, your first step is to negotiate a short-term credit extension of at least six months beyond the current maturity date, which is a common practice. That will give you time to explore your options, including finding new financing, negotiating the terms, and completing all the paperwork and legal documents.
If the bank's reason for dropping you is neither poor financial performance nor covenant violations, you can simply approach other banks in your area and explain the situation. Be candid. It can be tempting to tell the banker that you're searching for another bank because you're "just not happy with the service" you've been getting, but most bankers won't buy that. They've heard it too many times.
Let the loan officer set the tone for handling your credit request. If your credit needs are small (say, less than $100,000), chances are that you will need to appear in person to make your application. If the loan you want is larger than that, the banker will probably want to visit you at your office.
Rest assured, it is by no means a deal breaker that your current bank has asked you to take your business elsewhere. Quite the contrary. Many bankers welcome the opportunity to demonstrate that they understand your business and industry better than someone else does. And that is how you should position your inquiry: as a chance for your prospective banker to prove that he or she "gets it." Explain the special characteristics of your industry or business and how you manage unusual risks. This is your chance to show that you're a company owner with whom the bank should want to do business.
If, however, you got into trouble because your financial-reporting system wasn't up to par (for example, your numbers were always late or wrong), this is the time to fix the problem. When you meet with a new banker, explain where you went wrong in the past and then demonstrate that you have made things right. You may have to provide additional collateral or guarantors to obtain new financing, but those can be released once you've proved your house is in order.
Even if your company is not a candidate for a traditional bank loan or line of credit, you still have banking options. For example, if you have a revolving line of credit secured by accounts receivable or inventory, you may qualify for an asset-based loan. Or perhaps you have valuable fixed assets, such as real estate or machinery, that could be pledged to secure a loan. Assets like those interest lenders who are more concerned with collateral than with cash flow. Ask your current loan officer if your bank offers those types of financing and if your company is eligible. If so, the application and approval processes will be less complicated because the bank already has most of the information that it needs to review your request.
If your bank does not offer such alternatives, and if another bank will not provide the credit you need, you can turn to commercial-finance companies that specialize in "unbankable" businesses. You'll have to pay a higher interest rate on the loan, and you may have to submit financial information more frequently. Once you've turned the company around and have operated smoothly for 12 to 24 months, however, you should be able to return to a traditional banking relationship.
As you go through the process of finding a new lender keep your current banker informed, whether the news is good or bad. The more you show that you're working diligently to move the relationship, the more unlikely it is that your bank will foreclose on the collateral or sue a guarantor for payment.
Paul A. Broni is a managing director of Mercury Partners, a finance and business-consulting firm in Rockville, Md.
Why banks say no
- Your company's financial performance is poor.
- You have repeatedly violated loan covenants.
- The bank loses money on your relationship or does not meet its target return.
- New bank management institutes new policies or favors a different loan mix.
- The bank either doesn't understand your industry or isn't comfortable with it.
- The bank has too much credit exposure in your industry.
- Your loan guarantor's financial condition has deteriorated.
- The bank has lost faith in your management of the company.