Demand Line of Credit?
What that means and what you should know!
You may or may not be aware that your Line of Credit at the Bank could be a Demand Line of Credit. It was either done this way originally or had been converted through a renewal process to this type of product. A Demand Note certainly isn’t anything new, but had historically been associated with non-bank/non-traditional lenders, but this has changed.
Under a Demand Line of Credit Note a lender can demand immediate payment of any or all principal and interest at any time regardless of whether an actual Default has occurred. Most of the time, a Note is called because of a missed covenant ratio or a lack of payments, which could possibly be rectified. Other times, it could be because a Bank wants to reduce its exposure within a specific industry that is perceived to be deteriorating.
If your business is experiencing challenges, it’s quite possible that this type of debt will be called by the bank. Banks are cashflow/credit lenders, not collateral lenders. If the situation reaches this point, the probability of resolving issues may no longer exist.
The next logical step is to negotiate a forbearance period that will usually provide 90-120 days to identify a new lender. Before going to market, it will be important to have a plan that identifies and addresses any issues and demonstrates the upside and opportunities the company has in moving forward.
Asset Based Lending, utilized correctly, can be an excellent resource for small to mid-sized businesses with past financial struggles, that no longer qualify for bank financing, are experiencing rapid growth, have financing needs beyond the capability of a traditional bank or do not want to dilute/further dilute ownership.
Most small to mid-sized businesses have little or no experience in this realm as there are a number of things to consider outside of just an interest rate. Special attention needs be paid to all the details of, not only the loan structure/terms, but also with the details associated with the information the Company will provide a prospective lender as part of its request for financing.
This type of situation can cause a lot of anxiety for a Business Owner. It’s important to understand when debt is called, there are ways to manage the situation. Here at the Steel Valley Authority/SEWN, we have plenty of experience that can help a Company get on track with a proper strategy. Regardless of what choice you make, it’s imperative that situations such as these are handled quickly and effectively.
Help is just a phone call or an email away if you want it and the costs of it are covered.