What To Do If Your Bank Calls Your Loan
If you are the director of a business that has had the bank call in a commercial loan, you may be wondering why they would choose to lose interest income. Also, this has probably put your company in a very precarious financial situation to which you have no answers. How can you immediately come up with the money to settle the outstanding principal? You may be forced to contact overstock buyers and get rid of excess inventory. This can help you to quickly raise cash reserves If you had the money to do that you wouldn’t need the loan, would you? Closeout wholesalers can help you buy purchasing your slow moving products or dead stock for cash. These businesses specialize in buying closeouts, distressed inventory and liquidation products.
Business loans differ from consumer loans in many ways. Banks and other commercial lenders often have covenants requiring a business to meet certain performance and liquidity benchmarks. This means you may have to liquidate inventory (get rid of excess inventory) to reduce stock levels and increase cash. Generally, this is a healthy practice anyway – even if you don’t have to do it to please your bank. Closeouts become a problem when they represent too big a percentage of your inventory. Closeout wholesalers and overstock buyers can direct you on the process to liquidate inventory you no longer need. Regarding lines of credit or loans, banks also typically have financial reporting requirements. If you fail to meet one of these loan agreement requirements, your lender may find you in default of the loan and you may have to immediately sell off some old inventory or dead stock to meet payment demands. If that happens, the lender can require you to immediately pay the full outstanding balance due. Many credit-line loans also these have on-demand provisions that allow the lender to reduce the maximum amount available with no notice or simply make the balance payable immediately. While these provisions may seem harsh, they are widely used in lending agreements.
OLenders don’t like surprises, so if you know you can’t make your next loan payment, it’s essential to reach out to your lender. Some lenders may be willing to work with you, whether that means allowing for partial payment, extending your due date, or even pausing your payments until your business is back on track. During this period you should examine your inventory for any slow moving products or dead stock where you can get rid of excess inventory to overstock buyers and closeout wholesalers. Preparing your lender in advance of missing a payment will give you more time and flexibility to figure out a solution that won’t leave you (or your lender) in the lurch. Excess inventory sales are a great way to keep inventory levels in check while eliminating too much inventory. There are companies that buy liquidation stock of all categories including closeout housewares to overstock inventory of sporting goods and toys.
If your bank calls in your loan or credit line, the first thing you should do is take a deep breath and imagine you are on the other side of the banker’s desk. Lenders know that most borrowers can’t simply write a check and pay their line of credit; otherwise they wouldn’t need one. They also understand how business can fluctuate, leading to overstock inventory situations and businesses having too much stock on hand. Bankers have two things on their mind: to get your loan paid off and to keep your loan off of the bank’s past-due list. That said, lenders are not likely to foreclose on the collateral unless you exhibit extraordinary signs that your business is rapidly liquidating merchandise, the collateral or otherwise compromising your ability to repay. Most lenders are not interested in acquiring your excess inventory and overstock merchandise. First, they won’t know what to do with it. Second, they will most likely end up disposing of it for pennies on the dollar – much less than they would get by being patient with you. Most lenders will work with you to find a way to pay off the loan. If you’ve fallen into unfortunate circumstances where you simply cannot pay back your loan, what happens next depends on whether you have an unsecured or secured business loan A secured business loan is backed by physical or financial assets as collateral, such as a house, a car, equipment, jewelry, or a savings account, while an unsecured loan is not backed by any kind of collateral.
When a secured business loan goes into default, depending on the exact terms of your agreement, your lender will be able to seize whatever assets you offered as collateral on your loan in order to recover the losses. For example, if you put up your business equipment as collateral for your loan, and then defaulted on that loan, your lender would be able to seize that equipment in place of the monetary payments you would have been making. They can also seize your entire inventory for liquidation just to collect what they can get. Companies in liquidation generally only recover a small percentage of original inventory cost. Banks can liquidate excess inventory at auctions, or by contacting closeout wholesalers and inventory liquidators capable of buying the entire inventory.
If you need additional information on the closeout process, an online search will help you locate different closeout brokers who you can contact about selling your excess inventory. Search terms like closeouts, buy excess inventory, warehouse liquidation and liquidate excess inventory will point you in the right direction.
If you or your business has equity in real estate, you may be able to refinance the property and get cash out. Many states prohibit borrowers from using home equity for business purposes, so check with your state first. Liquid assets like excess inventory can also be sold off to generate cash. Surplus merchandise wholesalers will make you an offer to buy either part of or your entire liquidation inventory. Closeout businesses with real estate equity can also use a combination of two loan arrangements: a factoring line of credit with accounts receivable as collateral, and a real estate equity refinance for permanent working capital. This dual loan arrangement allows for safety cash to be injected into the business and a working capital line of credit to be used for the future.
So your business has to have hard assets it can pledge to back up a business loan. Banks look very carefully at these assets to make sure they reduce the risk. For example, when you pledge Accounts Receivable to support a commercial loan, the bank will check the major receivables accounts to make sure those companies are solvent; and they will accept only a portion, often 50 or sometimes 75%, of receivables to back a loan. When you get an inventory loan, the bank will accept only a percentage of the inventory and they will kick a lot of tires first, to make sure it isn’t old and obsolete inventory. At best, the bank will value inventory at 50% to 75% knowing they will sell at a loss just to recover part of the bank loan. But in a business liquidation, inventory will often be sold for much less. Closeout merchandise only retains a small portion of its original value, and liquidation buyers view obsolete inventory as having only 10% to 20% of original cost value.
The simple act of missing loan payments hurts your credit store so a default makes an even more substantial impact. Lenders will likely regard you as a higher risk in the future, leading to higher interest rates and shorter repayment terms on future financing. Excess inventory is a regular part of doing business, but liquidating your entire inventory at a loss is something you will want to avoid.
Merchandise USA is an inventory closeout buyer in business 37 years. We specialize in selling closeouts to online retailers, closeout websites, closeout brokers and extreme discount brick and mortar store. We buy closeout toys, closeout housewares and home decor and overstock inventory of all consumer goods.
