The days of thinking that your loan will automatically renew at maturity are unfortunately over. Banks are actively reviewing their loan portfolios and if your loan does not fit their core portfolio, more often than not, the bank will choose not to renew your loan. It does not matter that you have made all of your payments on time and met all of the requirements of the bank; they simply want to exit the relationship.
Let’s look at why this is happening. Banks in years past, in order to be more competitive and grow their loan portfolios, made loans out of their comfort zone. These loans may have been at reduced rates not matching the risk of loan, made to businesses in industries that the bank had no experience, or been collateralized by assets the bank normally would not take as collateral. With the economic downturn, some of these loans may not have performed to the bank’s expectations therefore they are shedding all loans in their portfolio that do not fit their core business, whether performing satisfactorily or not.
So, how do you prevent this from happening to you? We would suggest that at least 90 days prior to the loan maturing, meet with your banker and get a feel as to what they would like to do at maturity. Come prepared with current financial statements and at least a 12-month income statement and cash flow projection. If your banker is willing to renew, get a commitment letter from the bank outlining the terms of the renewal. Do not be surprised if additional requirements are necessary for the bank to renew the loan. These requirements could be a financial statement audit as opposed to a review, additional covenants, or even additional collateral. It would also be in your best interest to go ahead and establish a relationship with another bank just in case something changes, as you get closer to maturity.
If, after the meeting, you find yourself in the unfortunate circumstance that the bank chooses not to renew your loan or you have received a notice that your loan will not be renewed, it is not necessarily a time to panic. It is a time to get prepared. Do a little research on www.FDIC.gov to find a bank that is in your area that is in good standing with the FDIC. Once you find a bank you would like to speak with (it is best to find more than one), please review our commercial loan checklist to help you get prepared for the bank presentation. This checklist outlines the things that will be needed for a loan package. Please note that additional items may be requested by the bank depending on the type of loan and the collateral being offered.
The borrower and banker relationship is definitely changing. Being prepared is key to moving that relationship forward.