In my last post, I discussed what small business bank deposit customers need to concern themselves with in case their financial institution is shaky. Today I am going to discuss the impact on loan customers.
Small businesses that have loans with banks that are taken over by the FDIC will start making payments directly to the FDIC, who will own your note. The FDIC could sell your note to another bank (usually at a discount) or keep it themselves. Either way, you are faced with the problem that the local loan officer and bank that made your company a loan in the first place isn’t there to help you when something needs to be done to accommodate other business needs.
For example, say your local bank loaned your business money to buy some equipment two years ago on five year payout. They would have likely filled a UCC Financing Statement naming all of your company’s assets as collateral. The practice of lenders filing “blanket liens” against all collateral is very common. You have paid 2/5ths of the note off and have never missed a loan payment, but now you need to set up a working capital line of credit with a new lender. The new lender is going to want to be able to have a 1st lien on accounts receivable and inventory, but those assets are already pledged to the first loan. Now that the first loan is owned by the FDIC, you have to find someone there who will talk to you and convince them to release their interest in the accounts receivable and inventory collateral. Good luck.
I had numerous dealings with the FDIC on issues like this during the 1992-1993 time period when we were in the middle of the last major banking crisis. Sometimes it would take weeks to find someone who would discuss a customer’s needs to get collateral released. Often the FDIC would simply say no without really considering a borrower’s request and current financial condition. If the FDIC acts in the same manner it has a previous history of doing, borrowers will have a great deal of difficulty borrowing money for other purposes.
If a small business is very financially sound, one solution is to find a new bank and refinance the loan with a new friendly bank. The new bank will pay off the FDIC and the company’s new debt will be easier to work with.
When a failing bank is merged with another bank, your loan then is owned by the new bank that has suddenly inherited numerous “good” and “bad” loans. Most all loans have a “call” provision in them that allow a bank to require immediate payment of all money due. If your business has not performed well on the loan, you may face such a situation where the new lender doesn’t want your loan on their books. Suddenly you will be working with the new bank’s workout department which usually isn’t a pleasant experience. Obtaining new credit will be difficult as long as your loan is considered substandard by the new lender.
There isn’t much that a small business loan customer can do to avoid the unpleasant experience of having to deal with either a Federal agency about your loan or a bank that you have no history with.
If you need to obtain business credit from a bank, look at the financial condition of your potential lender as I have described in my last post. If there is any way to avoid borrowing from a shaky lender, it is wise to do so.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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