Tariffs and Your Commercial Banking Relationship

The current government strategy of imposing tariffs is in the news 24/7. It has negatively impacted the economy, our global image and the value of many Americans personal investment portfolios. Based on my research and experience it may also negatively impact the relationship between a small business owner and their commercial banker. This situation is not prevalent yet but it is sure to come, and you the business owner must be forewarned and prepared. Here is why:

If you have a commercial loan outstanding with a bank one of the terms of the loan is that you must submit financial statements on your company on a regular basis. The banks use these financial statements to assess the on-going financial condition of your business to ensure that you will be able to continue to make your bank loan payments on time. They also use these statements to give your company an internal credit rating, let’s say A,B,C, or D. The banks pay close attention to companies  with credit ratings of C or worse, because they don’t want “problem loans“ on their books, nor do the Federal/State Bank regulators.

When you submit your financials to your banker and they witness a decline in your financial condition  which has been caused by tariffs, you may have a major problem. In this scenario your bank may  respond by (they can legally do so per their loan documents that you signed,):

• Decreasing their loan commitment
• Terminating your loan and demanding payment in full
• Asking for additional collateral
• Raising your interest rate
• Or, telling you to find another lender and leave the bank.

This is all under the umbrella of banks mitigating and managing the risk of their commercial loan portfolio. As was mentioned, they have to do this, because Bank Regulators have the authority to close (“risky”) banks down. What bank executive wants that to happen? Answer… None!

So… if the tariff situation has wreaked havoc on your financials be prepared and proactive not reactive. One of the most important proactive things you can do right now is to schedule a meeting with your banker as soon as possible, (before you submit financials). During the meeting tell your banker what the tariff situation is doing to your business and what plan you have developed to overcome the negative issues. They will then tell you if they like your plan and what revised loan plan  they have decided to implement. This is critically important.

Eugene E. Valdez is the CEO and founder of the Loan Doctor & Associates, Inc and full service small business consulting company. He can be reached at 909-230-0024.