Bank loan default or financial difficulties

Bank loans usually have conditions of default – with the bank being able to demand payment if one or more conditions are breached. And overdrafts are 'at call' as well – with the bank being able to request repayment on demand.

Before a bank decides to call in a loan, there's normally a discussion that takes place, and/or a letter expressing its concerns.

If the bank decides not to allow continuing default or escalation in borrowings, it must provide written advice that banking facilities have been withdrawn. In this case, the bank will ask that all monies be repaid immediately.

It's in your best interest to contact the bank immediately if your business is facing difficulties because there may be several ways they can help you.

The bank may:

  • agree to change your borrowing arrangements to make repayment easier
  • discuss the plans you have for improving cash flow and profits
  • recommend to discuss the problem with your accountant or advisor
  • put you in touch with independent advisers – who can potentially assist with your business problems

When talking to your bank about any difficulties, it would be helpful to provide them with a profit and loss budget and cash flow forecast – so they can see the issues your business is likely to face in the future.

How to deal with annual reviews

When a lender provides finance, there's a good chance they'll carry out an annual review. The review usually happens either when your annual accounts are available, or on the anniversary of the borrowing.

At the review time, they're likely to require up-to-date financials and all other relevant information summarising the last twelve months of your business operations.

This includes financials that demonstrate how you expect the business to perform in the future, such as a profit and loss budget and a cash flow forecast.

Annual reviews should be taken seriously – because banks and lenders always have far-reaching power to cancel a loan they've granted. The review results in a submission to the bank's administration with the manager recommending continuance or withdrawal of the loan.

Although a review of this kind may appear to be traumatic, there's nothing to worry about if your business is performing well – and it may result in an offer of further finance. If the business has been successful, the bank may also be willing to reduce its costs, but most likely only if you ask.

If your business has not been performing well – and you haven't previously advised the bank – you should be candid about the position.

Maintain a good relationship

Banking is essentially a hands-on type of activity.

One of the advantages of a well-developed banking relationship is the experienced bank manager can assume some of the role of an unpaid financial adviser. Bank managers have experience with many types of businesses and – since they're not closely involved – can give impartial advice.

A good bank manager keeps a watchful eye over the businesses under their control – evaluating the risks involved, and looking for new business opportunities. This creates advantages for a business that's well run.

As well as maintaining an overview that's designed to protect the bank, the bank manager is also a salesman with sales targets. A business that's clearly performing well needs more help from the bank, and can expect to get increased bank assistance where the business is growing.

Keeping your bank well informed of your business activities and performance will ensure they're ready to respond to any request you might have.

For the relationship with the bank to develop well, there's one fundamental requirement that you should observe at all times:

Adopt a candid approach and keep the bank properly informed about your business activities. Avoid any tendency to tell the good side and leave the bad side out of the conversation.

Any downward turn in events should be discussed with the bank manager as soon as it's known, and not when the overdraft limit is exceeded or loan repayments are late.

Keep in mind that while the bank is providing facilities, they're effectively in partnership with your business.