Bellwether Funding: So your bank has asked you to leave ...
You have enjoyed a productive banking relationship with your current bank, having grown in borrowings and deposits as your business has matured. However, your bank has gone through some changes since you began working with them years ago. Despite being a model customer, they tell you that you longer qualify as a customer. Why?
Plain and simple, the banking world has changed. Since the market crash of 2008, banks have more borrowers going into default, with many being their best loan clients. As a result, banks have been closely scrutinized by their examiners; either the OTS (Office of Thrift Supervision) or the FDIC (Federal Deposit Insurance Corporation). Examiners prescribe what loans the bank will keep, how loans will be underwritten, and what documentation the examiners will require. Lending guidelines have changed, and many loans no longer fit into these prescribed guidelines.
The key issue still remains; you need to move your loans and accounts, and find a new lender. Although this sounds like a simple proposition, it is more difficult than you may think given the current lending market. You need to be prepared for what has become the “new normal” in commercial lending.
Previous experiences with getting a new loan have not prepared you for the experience of today. You will have to provide more financial records, documentation and details than ever before. Loan officers no longer have personal lending authority, and the decision-making process and documentation is much more complicated. As one loan officer put it “We used to underwrite loans with a magnifying glass. Now we use a microscope.” The qualifying process for new loans involves three things: bank selection, documentation and “your story”.
Bank selection should be based upon the likelihood of receiving a loan and convenience to your business and can be broken down into 3 categories: most likely/convenient, less likely/convenient and alternative sources. Banks you choose to approach should not only be currently lending, but lending to your type of business or property type. You should find a suitable new bank through a process of elimination, but you may still have a situation that has disqualifies you for conventional lending. Issues such as high vacancy rates, historic losses, low personal credit scores, declining sales, or negative corporate net worth can eliminate conventional bank lending as an option. In this case, you will need to explore alternative sources. These include short-term private-money lending sources (known as either bridge or hard-money loans), asset-based lending, or factoring. Keep in mind that while these are more expensive sources, they allow you to leave your current bank situation, and buy time to qualify for conventional financing in the future.
Documentation is a major issue in the bank underwriting process. The bank will require significantly more items from you than when you first received your businesses’ loan program. While the standard package remains the same (3 years’ tax returns, 3 years’ year-end financials, year-to-date statements, personal financial and property or asset valuation), the current banking environment requires that additional items be provided. Items such as financials for affiliated entities, a schedule of real estate owned, a 12-month history of deposits and loan payments, and proof of succession plans are all part of the “new normal” in loan underwriting. Banks need to confirm that all data being submitted for consideration has been verified as accurate, coupled with no contingencies lurking in your background that may impact the repayment of the loan at a later date.
Finally, the story of how you became a recent bank orphan needs to be clearly shared with any potential new bank. First, you are being asked to leave another bank, which becomes a source of concern for new banks. The question becomes “What did the prior bank know that we don’t?” Your detailed story will help explain this. Second, for every new loan coming into a bank as a new client, there are several existing bank clients in the same industry that are being asked to leave the bank due to poor performance. As you can see, this sets a negative precedent to getting your loan request approved in the new bank. Having the specifics of your prior loan performance is critical to a new bank refinancing your loans.
Now that you have applied for a new loan at another bank, you still have the current bank to work with. They are asking you to move your loans with an increasing sense of urgency, and may threaten to take legal action if you don’t respond. This is where open communication with your current bank is critical. To a bank, no news is bad news, so keeping them informed of your progress in moving your loan is critical. Most banks will hold off on legal action if they know you are actively seeking to refinance out of their bank. They would rather see you move your loans to another bank quietly and promptly, and you can do this by keeping them informed. As long as you continue to show progress, they will continue to renew or extend your loans. However, you are still obligated to honor the terms of your original loan agreement. Timely payments, financial reporting, and full cooperation will all insure that they cooperate. This is also critical for your new bank, as they will want you to continue paying as agreed. This indicates how you will pay them when they refinance your loans.
By now you are establishing a new relationship with a new bank, while keeping a professional relationship with the bank you are leaving. Although it feels like there is no hope of finding a new bank, you can feel relieved that there are still banks that like you, and want your business.
That is always a good feeling.
Bill Frey is senior partner and founder of Bellwether Funding. He specializes in consulting and brokering of commercial loans. For more information, contact him at