What to Do If the Bank Calls Your Loan
When a business borrows money from a bank it is what is known as a demand loan. The bank has the option of calling that loan to be paid in full at any time.
For instance, if the economy is in decline and the bank feels your company may be in jeopardy, they may demand you pay all monies owing in full. When the bank requests payment in full you must comply. Despite the fact that your initial loan agreement was to pay a specified amount monthly for a term of several years, the bank still maintains the right to call the loan at any time. Each year a periodic bank review of your company's annual financial statement will be conducted.
Should the bank examiner see a decline in profitability, he or she may feel that calling the loan is justified because your company's risk quotient has increased. Generally the bank would like to see two parts profit and assets to one part debt, if the assets ratio decreases and the debt load increases, banks tend to become nervous and this is when they may call your loan.
Having said that, it is not a rule written in stone; if your company still shows potential despite losing money and can show that the losses were unavoidable or beyond your control, then the bank may continue to extend the loan until the next review. Much of this depends on your relationship with your bank and your bank manager.
The first and most common reaction any businessperson will experience once the bank has called their loan is fear. This fear is often so extreme it is almost like being in shock and is extremely debilitating, it creates mental confusion that leads to poor decision-making. The reason why most people experience this strong reaction is simply from lack of knowledge and experience. Ignorance of any subject creates fear of that subject; it is natural to fear the unknown.
The best way to avoid this extreme level of fear is to educate yourself about the potential for this situation to arise before it happens and research alternative methods of dealing with the bank.
The first thing many people do when faced with this challenge is to create a new business plan, create new projections to attempt to justify why their business has potential and take these materials to other banks in an effort to find a new lender. There are other banks that may be more accommodating than others; competition is fierce amongst lending institutions.
Should attempts to find other lenders fail or if a situation beyond your control occurs and has a devastating effect upon your business; for example earthquake, flood or other disaster whereby your business suffers to the extent that the loan is called, you may have another option. In the United States this option is known as Chapter 11, in Canada it is known as CCWA Division II of the Bankruptcy & Insolvency Act.
Accelerated Success, by Edward Lee
www.acceleratedsuccess.ca