3 Red Flag Phrases You Don’t Want to Hear From Your Bank

Bankerese is a language understood by bankers, but is a foreign language to most business owners.  Communication is happening, but the business owner doesn’t understand what’s being said or the implications it has for his or her business.  Often, we step in and interpret.  Here are three of the most important ones to know:

1. “Your loan is being transferred to Special Assets.”  If your banker tells you this, it’s bad news.  Your loan is an asset to the bank and it’s special (in a bad way) because it has more than average risk due to changes in your cash flow, your balance sheet or collateral most likely.  Banks put all their special loans (assets) in one department of the bank.  The sole purpose of this department is to collect the loans as fast as they can or get you out of their bank as fast as they can.  Rarely, if ever, do you go back to the former banker that was handling your relationship.
2. “Your loan is in default.”  A loan default is the failure to repay a loan in accordance to its term and the lender has or is about to take legal action to get the money back.  Defaults can occur through a variety of ways. 1) Failure to remit payment, or 2) you violated a provision in the loan agreement like a loan covenant.  Your bank should be willing to discuss with you options of what they can or can’t do, prior to declaring a default.  To avoid legal action, make every effort to come up with a mutually agreeable solution with the bank.  Many banks will accept a reduction of the loan balance, a higher interest rate or more collateral as possible alternatives to avoid default.
3. “Your loans are cross collateralized and/or cross defaulted.”  If you have two loans with the same bank, this means the collateral for Loan A (accounts receivable for example) is also collateral for Loan B (the company building) and vice versa.  It also means a default on Loan A is also a default on Loan B even if payments are current.  Before you sign the second loan, check your commitment letter or loan agreement to be sure this provision is not in the documents.  If your company is in good financial shape and there’s not a collateral shortfall on the second note, the lender should be willing to let both loans stand on their own.  If they refuse and want to “cross” both loans, you may want to consider taking the second loan to another bank.