We have seen time and again that commercial loan borrowers are getting requests from their existing commercial lenders to make pay downs, sometimes large ones, on their commercial loans and lines of credit. Many times these pay down requests are at maturity, but in some cases they are in the middle of a commercial loan term, and are not part of the normal repayment program. Some borrowers go along with their commercial lender and make the requested pay down, while others refuse to or are not in a financial position to do so. And some lenders make promises of advancing money in other ways or tell their borrower the relationship won’t be changed after the pay down, when in reality it will be. The question then becomes what should a borrower do in those situations?
Ultimately, it all boils down to the relationship you have with your individual commercial lender. But anytime a lender requests a pay down mid-term that is not a planned or included in the loan documents, it should raise alarm bells. If you make the pay down you have to anticipate the bank is not going to give you that money back. And if the pay down is on a line of credit, the bank may reduce availability on the line of credit to the remaining principal amount still outstanding after the pay down was made. Most borrowers do not realize that almost all commercial loans have clauses in them where they can be reduced or called due in advance of maturity if the bank believes there is a problem or concern, or a covenant has not been met. And most lines of credit can be reduced upon any decision of management. If a bank is under an order from the FDIC, they may no longer be able to fund on a line of credit or advance on a construction loan, meaning a pay down will never get advanced back out at a later date. So a borrower has to be prepared that principal payments to commercial lenders that request them outside of the norm of standard payments is likely money that is gone and won’t be available again for a while.
Depending on the terms of your individual commercial loan, a borrower might not be required to make that principal pay down. Often times other terms can be negotiated, such as shortening the amortization, making small principal payments each month, or in some cases not making any change but providing updated financial information that gets the lender comfortable again. The key is to not rush into making a principal pay down until you are sure you can afford it and it will not impact your business. At the end of the day commercial lenders are ultimately out to protect themselves and the institution they work for, and in desperate times even good people say things and do desperate things to protect their jobs and their livelihoods. So be cautious when it comes to your decision on whether or not to make the principal pay down, and be sure to review your loan documents, and consult with your attorney and accountant to be sure the decision makes the most sense for you. And if the situation goes sideways, there are also outside consultants who do nothing but work with banks and borrowers in troubled situations, and they may be able to advise you on all of your options.