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Demand Loan /Special Loans / Callable Loan Refinance
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Financing & Cash flow are the biggest issues facing businesses today
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AVOIDING MISTAKES WITH A DEMAND LOAN CALL
When a business demand loan has been called by the bank there has never been more of a time when you need to make sure a ' perfect ' solution is needed, in a timely manner.
THE BANK WANTS YOU TO SIGN A FORBEARANCE AGREEMENT - HOW DOES A FORBEARANCE AGREEMENT WORK?
The key to the meaning of a forbearance agreement in Canada is the lender's agreement with your company to a specific date. That allows your firm, the borrower, to focus on a refinancing plan.
We've got some solutions, and refinancing commercial loans might not be as difficult as you think.
Not all business owners or their financial managers will always understand why a bank has called their commercial loan - why would they forsake interest income and put your company in a very difficult position? In many cases, your firm might have even not missed a payment!
THE FORBEARANCE AGREEMENT
The forbearance agreement is the borrower's agreement with its secured lender around the temporary postponement of payment terms under their borrowing agreement with the bank. Issues covered in the agreement will include deferral and deadline times and conditions agreed to by both parties - in certain cases banks, for example, will charge fees or raise the interest rate on the loan or line of credit facility in exchange for not taking legal or liquidation action. This is a time in which borrowers must address temporary refinancing.
That ' forbearance letter ' is a call to action like no other. You need the help and ability to restore your company to a more financially healthy state via a new loan or line of credit or additional loans/refinancing at a monthly payment. interest rate, and structure that makes sense for your business and industry.
WHY CALLABLE LOANS? UNDERSTANDING YOUR RIGHTS
Callable loans reduce financial and credit risk to the bank or lender - If a bank or similar financial institution determines the entire loan can be repaid it will take steps to force payment on the full balance. Typically general economic conditions or industry-specific conditions will drive the bank to call a client's loan, although it is often just general financial deterioration in the borrower's financial condition.
Borrowers will choose demand loans as they have the ability to repay the loan at their options - typically without penalties- Demand loan borrowing will often relate to such financings as bridge loans, short-term working capital or business credit lines and for the purchase of certain assets in the business.
UNDERSTANDING YOUR RIGHTS - CALLABLE LOANS
What then are the steps required to ensure survival in the demand loans and callable loan scenario when your company has entered into a forbearance agreement under their call provision? The definition of that is when the lender, typically a bank, but not always, allows your business to amend the original monthly payments and covenants. Your goal: avoid receivership/bankruptcy and litigation, and guide your business into a more healthy state with the right traditional or alternative lender by debt consolidation and refinancing in a manner that makes sense for your particular firm and industry.
YOUR SPECIAL LOANS STRATEGY
There is no more challenging time for a business than when a company is placed in the ' high risk ' special loans section of a bank or other lender - If there is good news it is simply that business financing options exist to improve the chances of returning to normal business conditions via bringing back financial stability to the business.
Understanding the issues around why your firm has been placed in a demand loan-type scenario is key, typically these circumstances revolve around lower sales revenues, and a major change in the industry or general economy, all of which lead to temporary default of repayment, - Next stop - addressing the issues!
Sales growth will sometimes address many of the issues, but in some cases, expense reduction will be a close second. At the top of the list? Refinancing from alternative sources of business credit - In many cases this might be an asset-backed lender solution. For larger firms venture capital or private equity might be a solution - this is rarely the case in the SME sector for small and medium size companies.
At the same time, efforts need to be taken to potentially renegotiate new financing terms of extension of existing financing - this is typical during the forbearance period so a key business plan and existing strategy must be focused on regarding the classification of special loans.
During this challenging period reputation within the industry and with supplies must be addressed, as well as keeping key employees up to date around typical concerns of vendors and staff- given that the consequences of default are potentially looming,
Ultimately a combination of understanding the current situation and putting an exit plan in place is job 1!
THE SECRET TO SAVING YOUR COMPANY FROM THE SPECIAL LOANS / DEMAND LOAN DISASTER
At 7 Park Avenue Financial, we arrive with our tool kit of potential balance sheet restructuring scenarios for demand loans and other restructuring needs - that might mean stabilizing current cash outflows, refinancing existing debt under a new loan payment scenario, and borrowing money to implement immediate liquidity based on existing sales and assets.
At 7 Park Avenue Financial we know that a secured lender can of course call a loan or demand loans in a number of circumstances, including apparent overleverage, defaults on pre-agreed covenants, and losses relating to margin reduction and cash flow deficiencies. The goal becomes one of stabilizing cash, finding new sources of business funding ( either alternative or traditional ) and focusing on solutions for short-term cash facilities to allow for a possible restructuring of the balance sheet.
At times of potential serious financial challenges, we bring some additional ' bandwidth ' to a time when refinancing issues become complex and time-consuming. Management and current owners need to focus on daily operations. 7 Park Avenue Financial prepares business plans that, if required, meet and exceed the expectations of all commercial lenders.
DIFFERENCE BETWEEN LOAN MODIFICATION AND FORBEARANCE / NEGOTIATING YOUR DEMAND LOAN FORBEARANCE AGREEMENT
However, when you are in the ' special loans' category at the bank there is only one immediate goal - Where can the funds come from to settle the bank's outstanding demand loans/loan? Ensuring business survival becomes job 1!
TIMING IS EVERYTHING IF YOUR LOAN HAS BEEN CALLED
Your goal - protect the assets and keep the business running ! Timing is everything if your firm has been placed in, or notified under a ' Special Loans ' scenario. An agreed-upon new repayment schedule must be considered, and companies should note that typically higher fees and miscellaneous charges such as appraisals may also be requested by the bank/lender.
THOSE RATIOS AND COVENANTS
Every business and industry typically has different issues around what caused the loan to be called. More sophisticated lenders such as banks and mortgage companies may have concerns about the ratios and covenants your firm originally agreed to. They might also have a concern about the position of other lenders your firm may have entered into for additional financing.
ISSUES AROUND GOVERNMENT SUPER PRIORITIES / TAXES
One of the most severe scenarios under a callable loan scenario is when monies are owed to the Canada Revenue Agency under payroll taxes or HST. Is there any good news?! Borrowers will be glad to know that under many refinancing arrangements the' deemed trust ' position of the government can be paid out under new financing arrangements, typically via an alternative finance lender. In some cases, a well-documented and agreed-upon payment plan can be negotiated with CRA. This is a great time to get some ' tax advice ' around government liens.
That challenge, unfortunately, comes with short time frames and the pressures on the business can be intense as the company's future is in doubt.
HOW BANKS VIEW DEMAND LOAN REPAYMENTS RISK
On its part, the bank has rules around the timelines on called loans and the loan balance outstanding and their ability to ensure their capital and liquidity. So they are always looking at their commercial loans to determine in their minds what might be signs of financial distress. In other words, they are monitoring what might be potential ' bad debts.' By ' calling loans ' banks, or in some cases a business credit union are in effect increasing their liquidity. It's not always about the prime rate!
UNDERSTANDING THE NEGOTIATION PROCESS
Initial steps in refinancing your business will revolve around ensuring banks are behaving properly, perhaps negotiating new deadlines, or negotiating settlement proposals. These actions are often best served when you are working with a trusted, credible, and experienced Canadian business financing advisor with a track record of success.
In many cases, ratios and covenants can be renegotiated, and some firms may on their own be able to bring in new capital under specific new terms and conditions. Don't forget that callable loans are a costly process for the bank also, so a mutual solution is often very desirable. Business owners are well cautioned to ensure they understand the ' call provision' in their loan documents. Bank documents can always be a bit overwhelming when it relates to the credit limit and further access to drawdown and amended loan payments regarding banks calling in loans.
Developing a professional reputation with the workout mgr at your bank in this time period is critical. They are experienced in dealing with challenging credit situations, from simple to complex.
So what about the 'real world ' solutions to refinancing your business in a special loan scenario?
BASIC SOLUTIONS FOR PROTECTING AND REFINANCING YOUR BUSINESS
A typical refinancing of your business under forbearance/demand loan scenarios will involve a new operating line of credit, typically asset-based and focused on current and long term assets as your total borrowing base. At 7 Park Avenue Financial we work with businesses to ensure a new and solid business plan and cash flow projection is put in place.
Where necessary a reappraisal of critical assets will also suggest possibilities for new financing, for example, a sale-leaseback.
Unfortunately in some situations staff reductions and sales of assets may also have to be considered by the owners.
Asset-based lending solutions are often the best way to solve the challenge of new financing options when a demand loan has been called. While the interest rate, financing costs and fees will always be important it becomes a question of access to capital versus the cost of business capital. In some cases, a variable rate may be able to be negotiated.
BUSINESS REFINANCING SOLUTIONS IN CANADA
Solutions depend on the loan amount and can include:
A/R Financing Credit Line/Factoring/ Confidential Receivable Financing
Inventory Loans
Access to New Canadian bank credit/term loans/lines of credit
Non-bank asset-based loan or line of credit
SR&ED Tax credit financing
Equipment / fixed asset financing
Cash flow loans
Royalty finance solutions
Government Of Canada Small Business Loan Program - The Guaranteed federal business loan
Purchase Order Financing
Short Term Working Capital Loan/ Merchant Advance/Business Credit Cards ( Reasonable Owner Personal Credit Score Required )
KEY TAKEAWAYS - DEMAND LOAN / CALLABLE STRATEGY
Focus on a plan for repayment of existing debt while increasing sales and reducing business expenses
Lender communication is key
Review new sources of business financing such as asset-based lending solutions for business cash flow and interim short-term financing
Repair reputation issues around employees and vendors/suppliers around business credit rating
Assess the risks around default provisions in current loan agreements
Prepare a business plan and new business model strategy/focus
CONCLUSION - WHAT THE BUSINESS OWNERS NEED TO KNOW ABOUT DEMAND LOANS AND CALLABLE LOANS
When considering refinancing strategies most experts recommend external expertise that allows you to receive and view the right recommendation around a new lender/lender at an interest rate and structure that makes sense for your business.
Speak to 7 Park Avenue Financial, business finance experts with specialized knowledge in business downsizing/refinancing and recapitalization under a forbearance plan for a new loan agreement. While lower rates may not be possible in many circumstances rest assured 7 Park Avenue Financial financing solutions will allow you to regain business footing.
FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is a callable loan?
A callable loan is a type of loan that allows the lender, typically a bank to demand full payment if loan agreement provisions are not met by the borrower based on financial risk. Full payment of the loan under the lender demand can be issued at any time when borrowers default on repayment provisions as specified in the term loan or business line of credit agreement - A call loan is different from other loans as its repayable at any time ' on demand ' if the lender does demand and request payment at its option.
Demand loan repayment options must be considered and addressed by the borrower and negotiating a forbearance agreement becomes an immediate priority when a loan is called - Numerous alternative financing options are often available to the business to avoid bankruptcy or receivership, and the negative impact on business and owner credit score as well as any personal guarantees that might be in place on the financing - Those restructuring options will often focus on generating cash and general cash flow management
A call loan rate is typically related to an interest rate charged by a stockbroker versus a business term loan or line of credit.
