January 30, 2019 by Reece Tomlinson
For any business, when an on-demand debt instrument, typically a loan or line of credit, is called by the bank, which simply put means that the company must repay it immediately; it often causes the type of concern that makes your heart feel like it skipped a beat.
Unfortunately, for most organizations and especially smaller organizations, the lending agreements they enter into are typically always on demand, which means the risk of debt being called by a lending institution is a real one that almost any business can, in theory, face at any time. A loan or line of credit being called can happen for a number of reasons but generally they are called when banking covenants are not met, payments are missed or some event has occurred, which has made the lending institution feel the need to get their money paid back, in full, immediately.
For a business leader whose business is already experiencing challenges, having your debt called by your bank is often perceived as the proverbial kiss of death for the business and in many cases the well-being of its owners’ and shareholders who have often guaranteed the debt.
The good news is that there are a number of options available to resolve the situation. The catch is that they need to be done quickly and with precision. Below are some actionable items that, from experience, can be taken when an on-demand debt instrument or banking facility has been called:
Contact the bank immediately, determine the rationale for calling the loan and ask for an extension so you can properly review, address and correct the issues that have caused the loan to be called.
In the event that a banking covenant has been missed these can often be corrected by addressing and correcting the issue causing the covenant to be offside. For example, if the bank requires a specific working capital ratio to be met, the answer can be as simple as ensuring all relevant factors are being considered in the covenant calculation or collecting outstanding accounts receivables to free up capital or a short-term injection of capital.
If the bank has called the debt due to lack of payment then the quickest solution is to work out an agreement with the bank to get the account back into good standing, pay some or all of the debt back and by doing so, avoid the bank pushing the company into receivership. In the event that the company cannot make a payment to correct the situation, the company can provide additional security to lower the risk the bank may face in a default scenario. This can often be done via corporate assets or the assets of the owner via a personal guarantee. By doing so, ownership displays their confidence in the company and its ability to correct the situation.
In the event the bank is not willing to work together towards a resolution and is demanding that the company’s account be “de-marketed”, which is banking language for removing them as a client, the path forward is to find another institution that will take on the debt that the bank is calling. This is often easier said than done. In reality, it is possible if the correct actions are taken to provide another lending institution enough confidence in the company to buy out the debt and provide a new lending facility thereof. In such a situation, it is extremely important to implement a forbearance agreement with a minimum of 90 – 120 days before any actions are taken by the bank in order for the company to have the time to correct the situation.
In certain situations where the company is experiencing sizeable financial challenges, the future appears challenging and finding another bank is unlikely, it is incredibly important to create a plan that instills confidence that the company can turn things around and emerge from the situation and by doing so, ensure that the bank does experience a loss.
It is important to understand that when a debt instrument is called, there are ways to manage and control the situation. Options are available; however it is imperative the situation is handled quickly and effectively.