What To Do if a Bank Tightens Up Your Advance Rates

Author: Larry Chester

If you’re like many business owners, you may have a loan from your bank.

Many of those loans are often asset-based loans, also known as ABL loans. In this case, the bank is giving you a percentage of those quick assets—either inventory or accounts receivable (AR)—to provide support for the loan they’re giving you.

Depending on the situation, either in your company or at the bank, the bank may change those advance rates and therefore hold on to more assets to support the loan that they’re giving you.

This can create a problem for business owners because it affects the amount of money they’re able to borrow.

But the big question is, why are they changing those advance rates? Here, we have Larry Chester, President of CFO Simplified, on camera to discuss why a bank might change advance rates as well as what to do if a bank tightens up your advance rates.

Let’s dive in.

Why Is My Bank Changing Its Advance Rates?

There are many reasons why your bank might tighten up your advance rates.

On one hand, if it’s because your bank is concerned about the value of your accounts receivable or the value of the inventory you’re holding, that’s something you can negotiate.

On the other hand, if they’re changing the advance rates because they want you to leave the bank, that creates a different situation. Why? You may be facing what many banks call “bank fatigue” with regard to your loan.

Bank fatigue might mean that your bank feels like:

• Your financial reporting isn’t getting done on time
• Your financial reporting is inconsistent
• They don’t trust the way you’re running your business
• They would rather have you take your banking relationship elsewhere

As a business owner, there’s not much you can do about that without changing your relationship with the bank.

However, if your bank is changing your advance rates because they’re concerned about your accounts receivable or the value of your inventory, there are some things you can do to demonstrate there’s no need to reduce your advance rates.

What To Do if a Bank Tightens Up Your Advance Rates?

Here are some action steps you can take.

InRegarding Inventory

In the case of inventory, if your inventory has risen above a level it normally has, you need to show that your inventory turnover is increasing as well. This means you need to have additional inventory to support sales.

The bank will not be concerned if you’re turning inventory over quickly through sales. They will only be concerned if your inventory level is increasing but sales are not increasing in relation.

Showing your bank that you have an effective turnover rate for inventory will undoubtedly help you.

Moreover, inventory may be increasing in value because of inflation or changing manufacturing costs from your suppliers. If you can show them that’s happening in the marketplace overall, you can maintain your advance rates.

Regarding Accounts Receivable

With regard to accounts receivable, one thing banks are always concerned about is customer concentration.

If you have a heavy customer concentration with one, two, or even five customers, they may tighten up your advance rate because they feel that there are too many eggs in one basket. Therefore, your company may be at risk because you have too much money out with one particular customer.

In this case, you can either be in a position where:

• You get more customers so that your accounts receivable are spread over a larger group of customers, or
• You get credit insurance to support the money that you’re providing to those customers

Either way, that will give the bank confidence that they can collect the money they need from your assets should something go wrong.

Interested in learning more? Read on to find out how to choose the right banking relationship.