Photo by Hillary Ehlen
You’re an expert in your industry. That’s why you became an entrepreneur. But, you don’t know anything about corporate structure, tax filings, loans, HR or the thousands of other minutiae you deal with every day.
At Fargo INC, we want to help businesses grow. That’s why we found 10 business owners and executives and asked them for their toughest business questions. We then paired them up with an expert in that industry. Here are your questions answered.
Senior Vice President of Business Banking for Gate City Bank
Owner of DJ Colter Agency, Inc. – American Family Insurance (Fargo, Grand Forks, Cando, Rugby)
Have you ever heard of a bank/lender “call a loan” after they receive updated tax returns, personal financial statements, etc. annually when there are no issues with payments being made on that loan?
To “call a loan” means that a financial institution can require you to pay off your loan immediately. While I have heard of a loan being “called,” this is usually a last resort.
Requesting updated tax returns, personal financial statements and other documents annually is a practice that banks are required to perform, due to banking regulations. The regulators have certain expectations that require banks to manage risk and monitor their business loan portfolios, including needing to review the financial condition of both the business and the owners.
Banks utilize these annual reviews as an opportunity to proactively address any possible credit issues. If both parties can address situations early on, they can work together to put a plan in place to prevent financial deterioration and future defaults on the loan.
Bankers have an advisory role, and partnership, with the business owner to ensure their finances are in order. Banks will have different perspectives when they review the financial statements and may be able to offer suggestions to improve the business. The annual financial review can help the banker stay apprised of the activity of the business, such as if they are looking to grow and will have financing needs.
Back to the topic of calling a loan – this is truly a last resort for a bank. A couple of the primary factors for a loan being called would be if the collateral securing the loan is not being maintained, or if there are loan requirements that the borrower has not complied with. Examples of those requirements could be having a minimum number of days of operating cash on hand, a limit on capital purchases or dividends, maintaining a minimum net worth or having a minimum income-to-debt ratio for the business.
Most banks, especially Gate City Bank, would prefer to work with a borrower before taking a drastic step such as calling a loan. A strong partnership between bankers and borrowers can allow them to work together on a mutually beneficial plan.