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Ask your business lender what they expect of you
by Jean Wojtowicz, President
Cambridge Capital Management Corporation
Q: "I've been reading a lot about the mortgage lending crisis. People are losing their homes because they can't make the payments caused by escalating interest rates. Should I be concerned about my business loans?"
A: The turbulence in the credit markets is affecting everyone, including borrowers with business loans as well as those with mortgages that they are able to pay. This is clearly a time to be very diligent.
Depending on the type of business you run, your customers may not have the ability to continue to buy as they have in the recent past, and you could experience a downturn in revenue. If sales are steady, you should try to reserve some funds in case business goes down.
This is doubly important now because if you have existing loans outstanding, you must make sure you are living up to the full terms of the agreement. You might think that because you are making your payments on time – or within the grace period – that everything is fine. Actually, there are many more terms to your agreement in addition to making payments on time.
The other conditions for your loan will depend on the type of financing. For example, the payments for a loan with a fixed interest rate will remain steady, while a rate based on the prime rate – or another indicator – may change, requiring that you pay very close attention each pay period to ensure that you send in the right amount. If you have taken out a loan based on your accounts receivable, the reporting requirements are different, and stricter, than for other types of conventional financing.
There is another big factor: you may have no way of knowing the pressures your lender is under. If you have any question about your lender's expectations and how they may change because of other factors, you must ask them. Even if there is no doubt in your mind, you would be wise to talk with your lender anyway.
Your lender has probably given you a list of requirements for you to fulfill. The penalties for missing a reporting deadline, for example, may include an escalated payment schedule. In a worst case scenario, your loan may be called in.
If you keep an open line of communication with your lender, it may boost their confidence to know you sincerely want to meet all the terms of your agreement.
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