I’ve been writing about bank loan restrictions and clauses for a few weeks now. We went over blanket liens and compensating balances, and now we’re going to talk about maybe the scariest one of all: annual requalification.
If you thought the bank saying “yes” when they gave you the loan was the end of them looking at your company’s finances, think again – it’s not. Written into virtually every bank loan contract is a clause that gives the bank the right to make a borrowing company “requalify” for the loan annually. And if the bank doesn’t like what it sees, they reserve the right to call in the entire loan immediately.
That’s scary. Especially since the last two clauses we discussed – the blanket lien and the compensating balance – means they can collect immediately. They can fully take that compensating balance they insisted on, and then they can seize any of your assets to satisfy the rest. That could cripple many companies.
The really odd part is you need not default on the loan for this to happen. You could be making all your payments on time, but if your overall financial picture degrades, the bank won’t care that they are still getting paid on time. They will instead say “you don’t qualify for this loan anymore”.
The thing is, a temporary drop in any company’s finances can happen. For example, maybe you lost your largest customer, and while your sales team is working hard to replace that revenue, your numbers are temporarily down. Or a bridge on your main road fails, resulting in an unavoidable-but-unfavorable-for-you detour. And it’s going to take six months for much of your retail traffic to return. Or a hundred other reasons revenue and profits temporarily drop. It happens – that’s business.
So imagine something “temporarily bad” like the above happens, but then the bank makes it 100x worse by calling in your loan(s). Talk about pouring when raining…
This is why yearly requalification is such a scary bank clause. It sits there innocently in the fine print, but when it does emerge, it’s always at the absolute worse time.
So what can you do about these bank restrictions? We’ll talk about that next.