Small Business Loans - Recall Possibilities

I recently published a special small business loans report which summarized the five factors which are likely to result in a worst case scenario for commercial funding. One of these issues was the presence of a recall possibility for commercial loans which allow the lender to call the loan, thus forcing the borrower to repay prior to the the loan expiration.

To avoid the recall situation in the first place, commercial borrowers would be wise to consider only commercial loans which will not have recall terms. Many traditional commercial lenders (especially local and regional banks) routinely place recall clauses in their loan agreements. The conditions which can trigger a recall will vary but will commonly include periodic review of financial statements and credit history by the lender. If specific income and credit standards are not met, then the bank will typically notify the commercial borrower that they must pay off the loan within a 30-90 day period. An even more onerous recall situation will exist if the lender can simply choose not to renew a loan on an annual basis regardless of income or financial conditions for the business.

When confronted with a recall notification, commercial borrowers will have little recourse other than to seek refinancing from another lender. In seeking alternative sources of commercial financing, prudent borrowers will eliminate potential lenders who will impose similar recall provisions in new financing. For commercial borrowers who currently have recall provisions in their business financing agreement but have not yet received a recall of their loan, it will be equally wise to consider refinancing their business loan before such a recall occurs so that refinancing is accomplished according to the commercial borrower's timetable and not that of the current commercial lender.