How middle-market businesses can manage a bank exit, evaluate replacement financing and protect liquidity during the transition.

Few conversations unsettle a business owner more than a banker explaining that the company’s credit no longer fits the bank’s lending profile.

The message may arrive during an annual review, ahead of a facility maturity or following a period of weaker financial performance. Sometimes the bank provides a formal non-renewal notice. In other cases, management is told that the relationship needs to be refinanced within a defined period.

For a privately held middle-market company, that creates an immediate financing problem. The existing lender may provide the operating line, equipment debt and other facilities that support the business. Replacing that relationship requires careful coordination, particularly when the company depends on revolving credit to finance receivables, inventory and everyday operating expenses.

A bank’s decision to exit can reflect several different circumstances. The company may have experienced covenant violations, losses or changes in its collateral position. The bank may also have changed its industry exposure limits, lending strategy or appetite for a particular type of credit.

Understanding the reason for the decision is the starting point for finding replacement financing.

Why a Bank May Decide to Exit a Credit Relationship

Commercial banks operate within established credit policies and portfolio limits. Those policies determine which industries they finance, the amount of leverage they will accept, the collateral they require and the financial performance they expect from borrowers.

A company can remain operationally sound while falling outside those requirements.

Consider a manufacturer that has experienced a difficult year because a major customer delayed production. Revenue and earnings decline, although the customer relationship remains intact and the company expects production to recover.

The bank still has to evaluate the business using its current financial performance. Lower EBITDA may create a leverage covenant violation, and reduced profitability may weaken debt-service coverage. Even with a credible recovery plan, the bank may be unwilling to renew the facility on its existing terms.

Other situations arise from the bank’s own portfolio decisions. An institution may decide to reduce exposure to a particular industry or limit concentrations in certain types of collateral. A relationship that was acceptable when the facility was originated may no longer meet current lending criteria.

These circumstances lead to different refinancing strategies.

A company with improving performance but a temporary covenant issue may attract lenders that understand transitional credits. An asset-intensive business with weaker earnings may be better suited to a lender that advances against receivables, inventory or equipment. A company with substantial leverage and limited collateral availability may require a more complicated capital structure.

The reason for the bank exit determines where the refinancing process should begin.

Establish the Bank’s Expectations and the Available Timeline

When a bank indicates that it wants to exit, management should establish precisely what the lender expects and when.

The maturity date is important, but it may not be the only relevant deadline. The credit agreement may contain notice provisions, financial reporting obligations, restrictions on additional borrowing and remedies associated with an existing default.

A revolving credit facility may also have availability restrictions that affect the company’s ability to operate during the transition.

The CFO should review the loan documents with the company’s legal advisors and confirm the bank’s position in writing. Management needs to understand whether the bank intends to allow the facility to reach its scheduled maturity, whether an earlier repayment is being requested and what accommodations may be available during a refinancing process.

Many banks prefer an orderly repayment to an abrupt disruption of a functioning business. Where management presents a credible refinancing plan and maintains communication, the incumbent lender may consider a short extension or other accommodation.

That outcome depends on the borrower’s circumstances, the loan documents and the bank’s own credit assessment. An extension should never be assumed.

The practical objective is to establish enough time to complete a realistic refinancing process while maintaining the company’s operating liquidity.

Understand the Company’s Financing Requirement Before Approaching Lenders

A replacement facility should address the company’s current financing needs and the requirements it expects to face after the transition.

This is particularly important when the existing credit relationship was established several years earlier.

A manufacturer may have increased its sales, expanded its inventory requirements or acquired additional equipment since the original facility was arranged. Simply replacing the outstanding balance with an equivalent amount of debt may leave the company with insufficient availability.

The CFO should assess the working capital cycle, seasonal borrowing requirements, anticipated capital expenditures and any scheduled debt repayments.

The review should also consider how much liquidity the business needs during the refinancing process itself.

A company experiencing declining sales may have less eligible receivables and inventory than it had when the original facility was established. That can affect the amount an asset-based lender is prepared to advance.

Likewise, a lender considering a cash flow facility will evaluate the company’s ability to service the proposed debt using sustainable earnings and realistic financial projections.

The financing request should reflect these constraints before it is introduced to prospective lenders.

Prepare the Credit Information That Replacement Lenders Will Need

A company approaching replacement lenders should expect a detailed review of both its financial performance and the circumstances surrounding the bank’s decision.

The financial information will generally include historical statements, current interim results, a forecast, a schedule of outstanding debt and an explanation of significant changes in operating performance.

For a working capital facility, lenders may also request accounts receivable aging, inventory reports, borrowing-base information and details of customer concentration.

Equipment lenders will want to understand the assets being financed, their condition, ownership and potential collateral value.

The most important part of the preparation is often explaining the underlying credit issue.

If the business has experienced losses, management should identify the causes and explain what has changed. If the bank is exiting because of an industry concentration decision, that should be made clear. If the company has breached a covenant, prospective lenders need to understand the violation and the response.

Tom Kessel’s experience in commercial banking has reinforced the importance of addressing difficult information early in the credit process.

Lenders can evaluate a borrower with known challenges. They have considerably more difficulty proceeding when material information emerges unexpectedly during due diligence.

A clear presentation of the company’s circumstances allows prospective lenders to determine whether the credit fits their underwriting approach before significant time is invested.

Choosing the Appropriate Replacement Lender

The replacement financing market extends beyond conventional commercial banks.

For some borrowers, another bank may be an appropriate solution. A lender with a different industry concentration, credit policy or geographic focus may be willing to consider a relationship that the incumbent institution no longer wants.

Other companies will need to evaluate non-bank financing.

Asset-based lenders may be appropriate where the business has substantial eligible receivables, inventory or other collateral but its earnings do not support conventional cash flow underwriting.

These facilities are typically structured around a borrowing base that determines availability from eligible assets. They can be particularly useful for manufacturers, distributors and other companies with significant working capital requirements.

Private credit lenders may consider borrowers with unusual operating circumstances, higher leverage, transitional financial performance or requirements that fall outside traditional bank policies.

The pricing, reporting requirements, collateral arrangements and covenant provisions can differ considerably between lenders.

Where the business has valuable equipment or owner-occupied real estate, separate asset financing may provide an additional source of capital.

In some situations, a combination of facilities will be appropriate. A working capital lender may finance receivables and inventory while another lender provides equipment financing or subordinated capital.

The objective is to establish a financing arrangement that supports the business’s operations and provides adequate liquidity.

Glengarry’s financing solutions address working capital and other borrowing requirements. Its subordinated debt solutions may also be relevant where senior financing alone cannot meet the company’s capital needs.

Why the Lowest Interest Rate May Not Produce the Best Outcome

Borrowers replacing a bank relationship often face financing proposals with higher interest rates than their existing facilities.

That difference deserves careful consideration, but the interest rate is only one part of the decision.

A facility with a lower stated rate may provide less borrowing availability, require more restrictive covenants or impose collateral limitations that make it difficult to support the company’s operating cycle.

Another lender may offer greater availability but require more frequent reporting, tighter control over collections or additional fees.

Management should compare the full cost and operating implications of each proposal.

For an asset-based revolving facility, the advance rates against receivables and inventory may have a greater effect on day-to-day liquidity than a modest difference in interest expense.

For a term loan, amortization requirements and financial covenants can materially affect cash flow.

Prepayment provisions also deserve attention, particularly where management expects to refinance into conventional bank financing after the company’s performance improves.

A higher-cost facility may be economically reasonable for a defined period if it provides the capital needed to stabilize or develop the business.

The terms should reflect the company’s actual cash requirements and a credible repayment or refinancing plan.

Managing the Existing Bank Relationship During the Transition

Communication with the incumbent bank remains important after the decision to exit has been made.

The lender continues to have a financial interest in the business until its obligations are repaid. It may also control collateral that must be released or transferred when the replacement facility closes.

Management should provide reasonable updates on the refinancing process and address any continuing reporting or covenant requirements.

A refinancing plan is more credible when it identifies the type of replacement financing being pursued, the information available to lenders and the expected steps toward closing.

The company should also coordinate the practical requirements of changing lenders.

These may include payoff calculations, lien searches, collateral releases, new security agreements, account control arrangements and the transfer of collection procedures.

Where multiple financing facilities are involved, lien priorities and intercreditor agreements may require additional negotiation.

These matters can affect the closing schedule even after a prospective lender has issued a financing proposal.

The earlier they are identified, the easier it is to develop a realistic transaction timetable.

What Happens if the Bank’s Deadline Arrives Before the Refinancing Is Complete?

A refinancing process may take longer than expected because of diligence findings, collateral appraisals, legal documentation or changes in the borrower’s financial performance.

If the existing facility is approaching maturity, management should communicate with the bank before the deadline becomes an immediate problem.

The bank may consider a short extension, revised repayment arrangements or another accommodation where there is a credible path to repayment.

The Office of the Comptroller of the Currency has recognized refinancing risk as an important consideration in commercial lending. Its October 2024 guidance discusses how banks assess borrowers’ ability to refinance outstanding obligations and the risks associated with approaching maturities.

The guidance also recognizes that prudent workout arrangements can be appropriate in certain circumstances.

That does not require a bank to extend a facility. It does reinforce the importance of a realistic refinancing plan supported by current financial information.

If the company cannot obtain an extension, its options will depend on the loan documents, the bank’s position and the financing alternatives available. Legal and financial advisors should be involved promptly.

Waiting until the maturity date has passed can significantly reduce the company’s ability to negotiate an orderly transition.

Can a Company Return to Conventional Bank Financing Later?

For some companies, non-bank financing provides a period in which management can improve operating performance, reduce leverage or address the issues that caused the original bank exit.

That may eventually make conventional bank financing available again.

The possibility should be evaluated when the replacement facility is arranged.

A company expecting improved earnings over the next several years should consider whether the proposed financing permits repayment without excessive penalties. Its reporting requirements and covenants should also be consistent with the operating plan.

There is no guarantee that a bank will be willing to refinance the company at a particular future date.

Nevertheless, establishing a credible longer-term financing objective can help management assess the economic cost of the replacement facility.

Glengarry discusses this approach in more detail in When Bank Financing Isn’t Available, including the use of private credit during periods when a business falls outside conventional bank underwriting requirements.

How Glengarry Capital Group Helps

Glengarry Capital Group works with privately held lower middle-market and middle-market companies that need financing beyond what conventional commercial banks are prepared to provide.

When an existing bank relationship is ending, the firm begins by evaluating the company’s financial position, its capital requirements and the circumstances surrounding the lender’s decision.

The next step is identifying the financing sources whose underwriting approach is suited to the business.

Depending on the situation, those sources may include commercial banks, asset-based lenders, private credit funds, equipment finance providers or lenders offering subordinated capital.

Glengarry prepares and positions the financing request, coordinates discussions with prospective lenders and manages the process through closing.

Tom Kessel brings decades of commercial banking and capital markets experience to that work, including an understanding of how lenders evaluate difficult credits and what information they need to make financing decisions.

For a company facing a bank exit, the immediate priority is to preserve liquidity while establishing a credible replacement financing plan.

The appropriate lender and structure will depend on the business, the reason for the bank’s decision and the time available to complete the transition.

Owners and CFOs facing a non-renewal or a request to refinance can contact Tom Kessel at tom.kessel@glengarrycapitalgroup.com to discuss their circumstances.