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Dealing with your bank and loan default

A good relationship with your bankers means they're in the best possible position to provide advice and support when needed.

On this page

  • Dealing with financial hardship
  • Deal with annual reviews
  • Keep a good relationship

If your bank loan is in default or you have financial difficulties

Bank loans usually have conditions of default, with the bank being able to demand payment if one or more conditions are breached. Also, overdrafts are at call, with the bank being able to ask for repayment on demand.

Before a bank decides to call in a loan, there will normally have been discussion and/or a letter expressing its concerns. If the bank decides not to allow continuing default or escalation in borrowings, it must provide written advice that banking facilities have been withdrawn, in which case it will ask that all monies be repaid immediately.

It is in your best interest to contact the bank immediately if your business is facing difficulties, as there may be several ways the bank can help you. They may:

  • agree to change your borrowing arrangements to make repayment easier
  • discuss with you, and if you wish, your accountant or advisers, your plans for improving cash flow and profits
  • recommend you discuss your problem with your accountant or advisor or put you in touch with independent advisers, who can help you and possibly assist with your business problems.

When talking to your bank about any difficulties it would be helpful to provide them with a profit and loss budget and cashflow forecast so they can see the issues your business is likely to face in the future. 

How to deal with annual reviews

When a lender provides finance it is most likely that they carry out an annual review. This usually happens either when your annual accounts are available or on the anniversary of the borrowing. At the annual review time they are likely to require up to date financials and all other relevant information that summarises the last twelve months of your business operations. This includes financials that show how you expect the business to perform in the future such as a profit and loss budget and a cashflow forecast.

Annual reviews should be taken seriously because banks and lenders always have far-reaching power to cancel a loan they have granted. The review results in a submission to the bank's administration, with the manager recommending continuance or withdrawal of the loan.

Although a review of this kind may appear traumatic, there is nothing to worry about if your business is performing well, and it may result in an offer of further finance. If the business has been successful, the bank may also be willing to reduce its costs, but most likely only if you ask.

If your business has not been performing well, and you have not previously advised the bank, you should be candid about the position.

Being well prepared for the annual review will show the bank you understand their requirements and indicate good management practices.

Keep a good relationship

Banking is essentially a hands-on type of activity. A good bank manager keeps a watchful eye over the businesses under his or her control, both evaluating the risks involved and looking for new business opportunities.
There are advantages in this for a business that is well run. As well as maintaining an overview that is designed to protect the bank, the bank manager is also a salesman with sales targets. A business that is clearly performing well can therefore expect to be able to get increased bank assistance where the business is growing and needs more help from the bank.

Keeping your bank well informed of your business activities and performance will ensure they are ready to respond to any request you may have.

For the relationship with the bank to develop well, there is one requirement that must be observed: there must be a candid approach that involves keeping the bank properly informed. Any tendency to tell the good side and leave the bad side unmentioned should be avoided.

Any downward turn in events should be discussed with the bank manager as soon as it is known, not when the overdraft limit is exceeded or loan repayments are late. Remember, while the bank is providing facilities, they are effectively in partnership with your business.

One of the advantages of a well-developed banking relationship is that the experienced bank manager can assume some of the role of an unpaid financial adviser. Bank managers have experience with many types of businesses and, since they are not closely involved, can give impartial advice.