Business owners take out lines of credit for any number of reasons – to finance operations, fund the start-up of special projects, buy equipment, embark on an advertising campaign or even to act as a rainy day fund.
In today’s turbulent economic climate, there have been cases of banks calling business owners’ lines of credit without advance notice and, in many instances, without apparent justification. As counsel to many businesses as part of its corporate law practice, Boston-based Tarlow Breed Hart & Rodgers, P.C. has some pointers for business owners with on-demand lines of credit.
“With the way things are today, it’s quite possible that a bank could call in a customer’s line of credit at any given time. While that might be unrelated to anything the borrower has or hasn’t done, business owners can put themselves on better ground with lenders,” said Bill Rodgers, a member of TBHR.
For starters, Rodgers suggests that businesses should, at all times, maintain compliance with the terms of the line of credit and the loan requirements. That not only means making payments on time, but also keeping up with timely reporting and observing all covenants of the loan.
“You also want to keep an open line of communication with your lender. If you’re experiencing some difficulty or if there’s a development at your business that could affect your line of credit, tell the bank sooner rather than later. Banks do not like surprises, particularly in challenging economic times. By communicating forthrightly and regularly, you build goodwill that could save your line of credit down the road,” said Rodgers.
“The sad reality is that there are times the bank’s decision to call your line of credit has nothing to do with your performance as a customer and is a reflection of what’s going on internally with the lender or externally in the customer’s industry,” said Rodgers. “That’s why having a contingency plan in place before the bank calls your line of credit is critical.”
Of course, doing your due diligence on a lender prior to taking out a line of credit can also better insulate business owners from having a banker make a surprise demand for payment of a line of credit. Some guidelines business owners can follow in selecting a lender include:
● Seeking out lenders who have an appetite for your industry (e.g. a lender who specializes in loans for construction companies is less likely to get jittery by turns in the real estate market).
● Seeking the counsel of financial intermediaries – working with somebody who knows the landscape and speaks the language of lenders can help prevent you from making a critical mistake. They can also tell you which institutions are giving out lines of credit at the moment.
● Looking to community banks – it was the larger banks that were hit hardest by the recent economic downturn.
● Being sure to have your own house in order – including having up to date financial statements and a current business plan in place.
“The current economic landscape has everybody—businesses and lenders—a little anxious. By doing your homework first and by proactively working with your lender, you can better protect your business against the unwelcome payment demand when you’ve got no way to pay,” said Rodgers.
About Tarlow, Breed, Hart & Rodgers, P.C.:
Formed in 1991, Tarlow, Breed, Hart & Rodgers, P.C. is committed to providing high quality, comprehensive legal services to its clients. Featuring a breadth and depth of experience and perspective usually found only at larger law firms, Tarlow, Breed, Hart & Rodgers. P.C. offers sophisticated legal counsel to entrepreneurs, businesses, individuals, families, and institutions.
Tarlow, Breed, Hart & Rodgers’ areas of expertise include corporate law and business transactions, litigation and dispute resolution, estate planning, taxation, real estate, municipal law, and hospitality law.
The offices of Tarlow, Breed, Hart & Rodgers, P.C. are located at 101 Huntington Avenue, Prudential Center, in Boston, MA 02199. For additional information, or to arrange for a consultation, please call 1-617-218-2000, e-mail firstname.lastname@example.org, or visit www.tbhr-law.com.