When request­ing a loan, most com­pa­nies opt for work­ing with their exist­ing com­mer­cial bank. This often appears to be the best and eas­i­est choice. Com­mer­cial banks typ­i­cal­ly offer the most com­pet­i­tive inter­est rates, and a strong work­ing part­ner­ship between the two enti­ties is already established. 

How­ev­er, a com­mer­cial bank tends to be very con­ser­v­a­tive with its loans. It is high­ly reg­u­lat­ed, inter­nal­ly and exter­nal­ly, to ensure that the bank is judi­cious with its funds and that it oper­ates with min­i­mal risk. Con­se­quent­ly, this risk-averse ten­den­cy means that there can come a time when the bank will decline a company’s request for capital. 

Why would a com­mer­cial bank decline a request? 

A bank could refuse a company’s request or try to remove a com­pa­ny from its client list for a vari­ety of rea­sons. First, it may be that the bank con­sid­ers a com­pa­ny too risky of a client. When a company’s inven­to­ry is grow­ing larg­er than accounts receiv­able or if its work­ing cap­i­tal time­line starts expand­ing, it will sig­nal to the bank that the com­pa­ny may ulti­mate­ly be unable to repay the loans it has tak­en out. 

Sec­ond, the bank could refuse a request because it is sim­ply not able to lend more cap­i­tal. Because of the way a bank’s covenants or for­mu­las work, even if a company’s request is valid and nec­es­sary, the bank’s activ­i­ty may be too restrict­ed to offer funds. 

Third, a com­pa­ny may not be prof­itable as a client. This typ­i­cal­ly occurs with good clients who have sound cred­it, and these com­pa­nies may be sur­prised to see the bank decline their request. How­ev­er, they may bring in lim­it­ed returns to the bank, because their activ­i­ty is lim­it­ed to with­draw­ing and repay­ing loans with­out pur­chas­ing any of the bank’s oth­er services. 

It is not in the bank’s best inter­est to sole­ly lend mon­ey, and even sta­ble, prof­itable com­pa­nies can be forced out or asked to leave. Pre­dict­ing when this will be can be chal­leng­ing, but there are three com­mon signs to watch for.

1. Unknown peo­ple show up unan­nounced in interactions

At some point, an unfa­mil­iar per­son from the bank will be added to a call, meet­ing, or email chain. While this may seem innocu­ous, this is a key indi­ca­tor that a company’s stand­ing with the bank is in jeop­ardy. This unknown per­son is often­times a mem­ber of the bank’s cred­it group or work-out group who is con­cerned about the com­pa­ny as a client. They are there to mon­i­tor the company’s activ­i­ty, advise on how fit the com­pa­ny is to be a client, and poten­tial­ly help move the com­pa­ny off the bank’s client roster. 

2. The bank refus­es even small requests

When a com­pa­ny calls its bank about a rea­son­able increase in its loan or change in a covenant, the bank may unex­pect­ed­ly refuse. Inter­nal­ly, the bank is already prepar­ing to retire the com­pa­ny from its client list. To avoid adding more paper­work or mak­ing the exit process more com­pli­cat­ed, the bank has cho­sen to begin by refus­ing small­er requests to slow­ly taper off the account.

3. The bank becomes less responsive

When calls and emails go unan­swered, a com­pa­ny can be almost cer­tain that it is in the process of being retired as a client via the bank’s work-out team. The bank is hop­ing that the com­pa­ny will grow frus­trat­ed with the lack of respon­sive­ness and find a new bank on its own, so the bank doesn’t have to go through the lengthy and dif­fi­cult process of for­mal­ly reject­ing a company. 

Do not wait until a com­mer­cial bank declines lend­ing capital

As a rule, com­mer­cial banks want to keep clients. Clients are expen­sive and time-con­sum­ing to obtain, and replac­ing an ​“exit­ed” client requires find­ing anoth­er client of equal or bet­ter qual­i­ty from some oth­er bank. Con­se­quent­ly, most banks won’t deliv­er a ​“no” until it is a hard ​“no” — and there’s no chang­ing it at that point. To com­pli­cate mat­ters fur­ther, that final ​“no” often comes when com­pa­nies most need help with liq­uid­i­ty — and there­fore lack the time to find anoth­er option. Any of these warn­ing signs are a clear indi­ca­tor that a com­pa­ny should take action right away. Should the com­pa­ny decide to wait, it will run short of liq­uid­i­ty and options, and it will lose pre­cious time to find­ing and mov­ing to anoth­er bank.

In this uncer­tain eco­nom­ic and polit­i­cal envi­ron­ment, com­pa­nies exposed to the sup­ply chain dis­rup­tion, labor short­ages, and cost infla­tion should be aware of the warn­ing signs of a dete­ri­o­rat­ing bank rela­tion­ship and of alter­na­tives to banks. Being proac­tive can help com­pa­nies avoid unnec­es­sary stress and dis­rup­tions to its operations.

Read Part two, ​“What to Do if a Com­mer­cial Bank Refus­es to Lend Cap­i­tal”: two options that can help guide you after your com­mer­cial bank rejects your request of more work­ing cap­i­tal, here.