Business Tip: Have you come to terms with your bank?

As many small business owners realize, the credit crisis has re-shaped the banking industry. Local banks and trusted institutions have merged or been taken over by the government. What many owners don’t do is thoroughly review bank contracts before signing. This approach works fine in times of economic growth and easy credit but fails miserably in a recession. Taking an extra few hours to read and understand your bank’s policies, and asking them upfront and direct questions, can protect you and your business from unwelcome surprises.

#1 The Bank has a blanket lien on your business…and in many cases your personal assets:
When banks extend loans and lines of credit many have stipulations that place liens on everything you own. Even funding a small amount of inventory or equipment yields a blank lien on the business. A blanket lien means if you default you are at risk for being put out of business as well as the possibility of losing personal property since you are a guarantor on the note. Since banks also have terms that allow them to call their notes, they can force their clients to pay off their loan at any point or risk losing their assets. They can call the note if your financial ratios change, your sales drop, your credit drops, or any other variety of reasons some of which are beyond the scope of your business. For example, I had a client whose local bank had overextended themselves and were being audited by the feds. My client had been a long term client of this bank, had sales in excess of $5 million annually, and had commercial and residential mortgages with this bank. Of course they were surprised when the bank demanded they pay $200k down on their line of credit by the end of the month or risk being in default and losing their assets.  The bank didn’t care because either they got their cash or they got my clients assets…worth in excess of $200k. My client was forced to max out credit cards and borrow from friends to temporarily meet this obligation.

As an owner, be prepared for what you sign and be prepared for the worst case scenario because there is always a chance it comes true. I will post future misconceptions of how banks operate over the next few days.