Plot Strategy Now to Avoid Credit-Crunch Disaster Later
Don’t panic if your lender wants to pull the plug on your business loan in the coming months. You have cards to play even in a worst-case scenario. By plotting your strategy now, you might avoid disaster if a credit crunch develops.
At the moment, debt capital remains available for the right risks, and the half-point cut in the federal funds rate last week may loosen things a bit. And as noted in this space recently, sources such as the National Federation of Independent Business report that small-business borrowers can get all the debt capital they need. But the word among lenders is that they are worried about some middle-market borrowers and may soon add small businesses to their list of borrowers to avoid.
Lenders being a skittish lot, this means the wise course is to anticipate what your lender might do if it gets antsy about your debt--and prepare your response. How?
Above all, don’t wait for your lender to come to you with bad news, said Barry Cappello, a partner in the Santa Barbara law firm Cappello & McCann, who specializes in lender liability and borrower rights law.
Schedule a meeting with your loan officer well in advance of your renewal date.
“Ask whether the lender expects any problem in renewing your line,” Cappello said. “And if your loan officer says there are no issues, follow up with a letter reviewing the discussion and telling the lender that you’re relying on the renewal and you need plenty of notice if the lender sees things differently.
“Don’t be hostile. It’s a business relationship, so be upfront about your expectations and get as much of a commitment as you can.”
Don’t worry if your lender responds with a letter emphasizing that it can make no commitment now about renewing your loan, Cappello said. The important thing is to make the lender aware that you expect plenty of notice should it decide to bail out.
To be sure, it’s no fun dealing with a lender who wants you to take your business elsewhere. Even in good times many business owners feel they’re at a disadvantage in dealing with their suppliers of capital, but the game gets more serious when the lender becomes skittish, Cappello said.
To prepare, look for signs of nervousness among lenders active in financing your industry. Check with your suppliers and competitors, where possible, and keep your eye on the financial news about industries on which you depend directly or indirectly. Cappello cited recent news about financial troubles among movie theater chains, for example, which might bode ill for mall owners who lease space to them. The garment industry also faces trouble, as do computer retailers and businesses caught in the California energy crisis.
Lenders know they risk lender-liability litigation if they act highhandedly in severing ties with business borrowers, Cappello said. But they also know how to pressure business borrowers to go elsewhere, in particular by brandishing the fine points in the covenants in any loan document, which outline the conditions under which the lender may call the loan, among other details.
Pay close attention to the covenants in your loan documents, Cappello advises, making sure you comply with every jot and tittle and offering your lender no excuses to cancel the arrangement.
“Your lender can’t arbitrarily end the relationship before the end of the term without citing a material reason and giving you notice and sufficient time to find another lender. And the business borrower should know that if you have a covenant violation that isn’t material and can be cured, the lender has a duty to let you do so.”
A material violation is one that can damage the bank, Cappello said. If the violation can be cured, it probably isn’t material.
“Failure to make payments is material,” he said, “but if you’re two days late filing your aging report or you file an accountant’s review and not a full audit, it’s probably not.”
Remember that the relationship between the lender and the business borrower is often personal, Cappello said, so make the most of it by negotiating personally with your own lender--and by planning ahead for difficult times.
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Recent Financing and Insurance columns are available at https://www.latimes.com/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
