How do I move my business loans to a different bank?

The loan comes with the relationship

A bank that takes over your loans is buying a relationship, and the loan is only part of it. The operating deposits, payroll, merchant card settlement and treasury services (ACH origination, positive pay, remote deposit, sweep accounts, corporate cards) are the rest of what a business customer is worth to a bank. That is why nearly every bank term sheet for a refinance carries a depository requirement: the business keeps its primary operating accounts at the bank.

For the borrower this cuts both ways. It is leverage: a company with steady balances and real treasury activity is worth more to a bank than its loan alone, and that can show up in pricing, a longer amortization or a looser covenant. It is also a commitment. Once the loan closes, moving the accounts again means moving the loan again. Before signing, read whether the clause says primary operating accounts or all deposit accounts, how any minimum balance is measured, and whether missing it costs a pricing step-up or counts as a default.

The same bank usually wants the whole debt stack it is being asked to replace: the term loan, the line of credit, the real estate loan if there is one. A new bank taking the term loan while the old bank keeps the line would leave two banks holding liens on the same receivables, which few banks will agree to. If one piece does not fit the new bank's appetite, that is worth knowing early, because the piece left behind stays under the old bank's documents, with everything that implies for cross-default.

What the new bank underwrites, and why it asks why

The credit work is the same as for any conventional term loan or line, with one addition: the new bank is taking out another bank, and it wants to know the reason. Price, a relationship manager who left, a bank that has stopped lending in your industry or will not grow the line with the business: these read well. A bank that has moved your loan to its special assets group, or a forbearance in place, reads very differently. That is a refinance under pressure, and the file should say so rather than let the new bank find it in the payoff letter.

What a new bank typically asks for on the lending side:

• P&L and balance sheet for the last full years, and a year-to-date P&L through last month-end.
• A debt schedule listing every obligation, with copies of the notes and loan agreements being refinanced.
• For a line of credit: an AR aging by customer with days outstanding, an AP aging, and an inventory report if inventory is in the borrowing base.
• Business tax returns, and personal financial statements from the guarantors.
• Recent statements on the loans at the old bank, showing the payment record.
• A lien search, so counsel knows every UCC filing, mortgage and deposit account control agreement the old bank holds.

Conventional bank lenders commonly look for debt service coverage of at least 1.25x on all debt after the move, not just the loans being refinanced. The line is sized against a borrowing base, the term loan against cash flow, and a real estate loan against an appraisal. Each piece has to pass its own test.

Some obligations will not move with the rest. Equipment notes held by equipment lenders, a seller note, or an SBA loan at a third lender stay where they are, and their lien positions have to be accounted for in the new bank's structure. On an SBA 7(a) loan with a term of 15 years or more, prepaying more than 25% in any of the first three years costs 5% of the prepaid amount in year one, 3% in year two and 1% in year three; see prepayment penalties.

The closing sequence, step by step

A bank-to-bank move is a chain of handoffs. The order is what keeps the business safe: new money pays off old debt before anything else leaves the old bank.

The payoff letter is the document that holds the sequence together. It fixes the number, it tells the new bank where to send the money, and it binds the old bank to release its collateral once paid. A payoff letter that is silent on lien releases, or that excludes a card program or a letter of credit, leaves a thread attached to the old bank after closing.

The risk window: set-off, covenants and cross-default

Until the payoff lands, the old bank still holds its loan documents, and those documents were written for exactly this moment. Four provisions matter.

• Right of set-off. Most commercial loan agreements, and the law in most states, let a bank apply money in your deposit accounts to what you owe it once a default exists. If anything trips a default before the payoff, the bank can freeze or sweep the account payroll depends on.
• Depository covenants. The old loan very likely requires your operating accounts to stay at the old bank. Moving deposits before the payoff can be a default in itself, which then hands the bank its set-off right.
• Negative covenants on new debt and liens. Signing loan documents with the new bank and letting it file liens before the old bank is paid can breach the old bank's limits on other borrowing and liens. That is why the new bank's liens attach at closing, funded by the payoff, and not before. See negative covenants.
• Cross-default. A default at the old bank can become a default under your equipment loans, leases or an SBA loan elsewhere, and can fail the new bank's own condition that no default exists. One misstep in the move can spread well beyond the bank.

Two items need handling before closing, not after. An outstanding letter of credit issued by the old bank has to be replaced by the new bank, cash-collateralized, or returned by the beneficiary; the old bank will not release its liens while it is still exposed on the letter. An interest rate swap has to be terminated or transferred, and ending it early produces a breakage amount that can run for or against you. Separately, if the old bank holds a deposit account control agreement or sweeps the operating account against the line, that arrangement stays live until the payoff is received.

Open the new accounts early; move the money late. Nothing leaves the old bank until the old bank has been paid.

Telling the old bank, and keeping it whole until you leave

The old bank will find out when payoff letters are requested, so the question is how. Owners who announce the move early and then stop sending monthly financials or compliance certificates invite exactly the default that gives the old bank its leverage. Keep paying on schedule, keep reporting, and keep every covenant in compliance until closing. If the old bank responds with a better offer, that is a legitimate outcome of the process, and the new bank's term sheet is the evidence that moved it.

Paying off the loans does not always end the personal guarantees. Many bank guaranties cover all obligations to the bank, present and future, including cards and overdrafts, and stay in force until the bank releases them in writing. Ask for that release with the payoff letter; see personal guarantee release on a refinance.

When another bank is not the answer

A bank-to-bank move works when the business is a good bank credit that happens to be at the wrong bank. When the reason for leaving is that banks in general have cooled on the credit, a new bank will read the same file and reach the same answer. The signs: a recent covenant breach, a down year, or debt above what senior cash-flow lenders to lower-middle-market companies commonly lend, which is 2x to 3.5x EBITDA.

Those files usually belong with a different kind of lender. Private credit lends further on cash flow and prices for it. An asset-based lender sizes a line to receivables and inventory rather than earnings. An SBA 7(a) refinance can work where the new payment is at least 10% lower and the debt has been current for the last 12 months. Choosing between a community bank and a national bank is a real question too, since they differ in what they want from the relationship.

Transparent's lender book holds 1,800+ lenders; the file goes to those whose appetite fits it. See how we underwrite.