BHR offers some precautionary tips for businesses with lines of credit.
DATELINE: BOSTON, MA
Business owners take out lines of credit for any number
of reasons – to finance operations, fund the start-up of special
projects, buy equipment, embark on an advertising campaign or even to
act as a rainy day fund.
In today’s turbulent economic climate, there have been
cases of banks calling business owners’ lines of credit without advance
notice and, in many instances, without apparent justification. As
counsel to many businesses as part of its corporate law practice,
Boston-based Tarlow Breed Hart & Rodgers, P.C. has some pointers
for business owners with on-demand lines of credit.
“With the way things are today, it’s quite possible
that a bank could call in a customer’s line of credit at any given
time. While that might be unrelated to anything the borrower has or
hasn’t done, business owners can put themselves on better ground with
lenders,” said Bill Rodgers, a member of TBHR.
For starters, Rodgers suggests that businesses should,
at all times, maintain compliance with the terms of the line of credit
and the loan requirements. That not only means making payments on time,
but also keeping up with timely reporting and observing all covenants
of the loan.
“You also want to keep an open line of communication
with your lender. If you’re experiencing some difficulty or if there’s a
development at your business that could affect your line of credit,
tell the bank sooner rather than later. Banks do not like surprises,
particularly in challenging economic times. By communicating
forthrightly and regularly, you build goodwill that could save your
line of credit down the road,” said Rodgers.
“The sad reality is that there are times the bank’s
decision to call your line of credit has nothing to do with your
performance as a customer and is a reflection of what’s going on
internally with the lender or externally in the customer’s industry,”
said Rodgers. “That’s why having a contingency plan in place before the
bank calls your line of credit is critical.”
Of course, doing your due diligence on a lender prior
to taking out a line of credit can also better insulate business owners
from having a banker make a surprise demand for payment of a line of
credit. Some guidelines business owners can follow in selecting a
- Seeking out lenders who have an appetite for your industry (e.g. a
lender who specializes in loans for construction companies is less
likely to get jittery by turns in the real estate market).
- Seeking the counsel of financial intermediaries – working with
somebody who knows the landscape and speaks the language of lenders
can help prevent you from making a critical mistake. They can also tell
you which institutions are giving out lines of credit at the moment.
- Looking to community banks – it was the larger banks that were hit hardest by the recent economic downturn.
- Being sure to have your own house in order – including having
up to date financial statements and a current business plan in place.
“The current economic landscape has
everybody—businesses and lenders—a little anxious. By doing your
homework first and by proactively working with your lender, you can
better protect your business against the unwelcome payment demand when
you’ve got no way to pay,” said Rodgers.
About Tarlow, Breed, Hart & Rodgers, P.C.
Formed in 1991, Tarlow, Breed, Hart & Rodgers, P.C.
is committed to providing high quality, comprehensive legal services to
its clients. Featuring a breadth and depth of experience and
perspective usually found only at larger law firms, Tarlow, Breed, Hart
& Rodgers. P.C. offers sophisticated legal counsel to
entrepreneurs, businesses, individuals, families, and institutions.
Tarlow, Breed, Hart & Rodgers’ areas of expertise
include corporate law, employment matters, mergers and acquisitions,
litigation and dispute resolution, estate planning, taxation, real
estate, bankruptcy, and municipal law.
The offices of Tarlow, Breed, Hart & Rodgers, P.C.
are located at 101 Huntington Avenue, Prudential Center, in Boston, MA
02199. For additional information, or to arrange for a consultation,
please call 1-617-218-2000, e-mail email@example.com, or visit www.tbhr-law.com.