Umbrellas in Sunny Weather

Preface: A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain – Mark Twain.

Umbrellas in Sunny Weather

In recent news, JPMorgan Chase CEO Jamie Dimon remarked that he is preparing the most prominent US bank for an economic hurricane on the horizon and advised listeners [investors] to do the same.

You know, I said there’s storm clouds, but I’m going to change it … it’s a hurricane, Dimon said. While [economic] conditions seem fine at the moment, nobody knows if the hurricane is a minor one or Superstorm Sandy, he added. Dimon continued to tell the roomful of analysts and investors; You’d better brace yourself. JPMorgan is bracing ourselves, and we’re going to be very conservative with our balance sheet. 

What was left unsaid in JPMorgan Chase’s publicized preparations for a financial hurricane is that some banks loan to borrowers on callable terms, i.e., the bank can call you and demand full payment of the remaining loan balance if they deem necessary.  A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. Mark Twain understands callable debt. What about you?

Before you become alarmed, this risk is more substantial for business loans and business real estate than home mortgages. So if you are an entrepreneur and haven’t checked the call features on your outstanding business bank debts, you’re advised to do so. Typically banks don’t call a loan if you’re meeting all the payment terms, but Jamie Dimon said he is preparing for significant financial risk(s). So it is plausible in the banking industry that it includes distressed business loans. 

If you pay your debt timely, the bank will likely never call your loan(s). So, for any entrepreneur who wants to plan for the imminent storm, here are a few suggestions. 

Firstly, do you know if you have any demand loans or term call options on your bank debt? Demand loans are often lines of credit that are renewed, say annually. This is the classic cause of business bankruptcy – a non-performing line of credit called when business cash flow is tight. After all, the bank needs to protect its equity. Typically, the prevention formula is to term or amortize your line of credits if unpayable in full after 6 to 9 months. 

A term call option loan is reviewed at specific intervals with a lender review process. If the review process occurs during exceptional cash flow duress, the bank can immediately demand full payment. The purchase of a loan call feature gives the bank protection of its asset(s). If the bank decides that having their money from you is safest, they can demand full payment when call provisions are in the loan terms. Often loans are called when your credit score is deteriorating, but could also remotely occur in an instance if a bank merely assesses your debt as perhaps a developing hurricane risk, to quote Jamie Dimon.

If you have callable debt, take extra precautions to keep your credit rating strong. Make all payments timely, and above all else, build a strong servant relationship with your banker(s). Proverbs 22:7 says, “the borrower is servant to the lender.” Servants have always benefited from a good or great master, so you will benefit from a good or great banker if your business has debt. 

Additionally, “The way to crush the bourgeoisie [middle class] is to grind them between the millstones of taxation and inflation” is a quote from Vladimir Lenin. In the Great Depression of 1929, when banks called loans, there wasn’t much of anything remaining after taxes were paid on the gains for some servants. Typically, inflation aligns with a higher tax environment, the likes of which would be a financial hurricane with present conditions. It’s not just interest rates. Higher taxes reduce cash flow for debt payments too.  

While home mortgage debt terms differ from business debt(s), this is written for entrepreneurs with any business debt level. As Jamie Dimon has warned, The US is approaching an economic environment of volatility and elevated risks. You now know what you should do to prepare. Invest the time to count the cost(s) of your business debt terms, and consult with necessary legal advisors if you have bank debt to assess any pending financial risk(s). 

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