Is Your Bank Ready to Call Your Loan?

Last week, George was shocked when his banker called up and said that he wanted a meeting the next day to review the performance of George's company and that his banker was bringing a couple of his senior people with him. 

 George had been a loyal customer for over 12 years, meeting all of the criteria defined by the bank and receiving their praise for doing such a great job in managing and successfully growing his company.   They even asked George about using him in a "relationship" television campaign to tout the strength between their bank and his company.  George sensed something was up so he spent the rest of the day and that night worried about this abruptly called meeting. 

 George was right; the meeting revealed that the bank was unhappy with the company's current year's financial performance.  George had 90 days to correct the problem - specifics left un-clarified, leaving George plenty of time to worry if his company was going to survive this economic downturn.

 This is a true story.  The government has spread billions of dollars throughout the banking community; with little effect on how banks are lending money to small businesses.  The reason, the regulators are continuing to tighten up who and what banks can lend to.  It is harder to get a business loan today than it was 12 months ago.  Loans easily made 12 months ago are nearly impossible today.   

 Here is a list of early warning signs that you may be in trouble with your bank and not even know it:

• The banker is spending more time with you and talking about the performance of the business
• New performance covenants are being designed for your business - particularly upon loan renewal
• You are given a "forbearance agreement" to protect your borrowing status
• The banker is asking for new appraisals on  your key collateral assets
• You are being asked cross collateralize all of your debt - even un-related debt. 
• New financing requests when approved are deducted from existing collateral  (line of credit borrowing base), even when the asset is viable to borrow against
• You are asked to give additional collateral for existing debt.
• The company was profitable last year; but loosing money this year. 
• The company's net worth is small relative to its total liabilities

 What you should be doing:

• Understand that this financing crisis is real
• Review legal documents to make sure you are in compliance with all loan agreements.  
• Step back and make a good evaluation of your business covering the following areas:

1) Is the revenue growing?

2) Are gross profit margins maintaining or deteriorating?

3) Are operating expenses growing faster than gross profit?

4) Are accounts receivable collections slowing down?

5) Are accounts payable aging getting longer and longer?

6) Is inventory turning according to industry standards?

7) Are financial statements being prepared on a timely and consistent basis?

8) Is the data in the financial statements accurate?  Is cash being balanced, are bad debts being written off, are all assets and liabilities correctly reflected on the financial statements?

9) Do you have a profit plan and are you working that plan monthly?