Featured Article – 2012 April

Your Banker and You: “We Can Work it Out”
By Chris Todd

When your business is doing well, and the rest of the economy is rolling smoothly, it’s easy for your banker to be your best friend. In that ideal world, cash flow is positive, revenue meets or beats projections and financing your planned expansion is no problem at all.

For the last four years, however, the economy has been sagging, businesses have been staggering, and friendship is a word that has disappeared from your banker’s vocabulary. Businesses that have had prolonged, stable and mutually satisfying relationships with their banks can no longer take those relationships for granted.

What’s going on?

Make no mistake about it, the tightened regulations introduced following the 2008 meltdown have banks paying closer attention to all their accounts— not only to avoid running afoul of regulators but also to make sure that their overall loan portfolios maximize both safety and profit.

In this environment, it’s not enough for your business to make all its payments on time. Your bank will be looking for additional metrics that show that your company is positioned to sustain its profitability. If doubt creeps in, your company could be headed for a meeting with the bank’s workout department.

As turnaround specialists, we often get the call to work with businesses that are caught completely off guard when their banking relationship changes. Many times, the business is struggling in the slow economy, sees its revenues decline and figures that it’s just a bump in the road, a situation the CEO figures his bank ought to tolerate because they haven’t missed a payment yet.

But banks see things differently. To the bank, that decline means that a greater percentage of its money is at risk, and, if your situation doesn’t improve, the odds that you won’t make payments on time, or won’t make payments at all, become greater.

Sometimes banks will alter their relationship with a business for reasons that aren’t necessarily related to a company’s financial condition. For example, six years ago we were called in to work with a business that manufactured parts that were eventually sold to a large auto manufacturer. The company’s bank, concerned with the manufacturer’s declining profitability at the time, concluded that its portfolio had too much exposure to second-tier and third-tier suppliers in the automotive industry. If troubles in the auto industry continued, the bank reasoned, ultimately these suppliers would see their orders shrink and they might go out of business. So, the bank embarked on an effort to shed some of those suppliers.

Regardless of the reasons for winding up in workout, your business will have to deal with the reality, and you will have to make changes. The workout officer will assess your credit, analyze your management team, review your financial trends and draw his own conclusions about your financial condition. The bank may reduce your credit line or increase your interest rate. If the bank thinks your problems are severe, it may recommend that you choose from a list of consultants — specialists like Beane Associates — to work with you to straighten out your operation.

For most business owners, none of this sounds appealing. But it’s not the end of the world. Your objective at this point should be to work with your bank and consultant to come up with a plan to reorient your business. You and your consultant will have about 45 days to draw up your plan. Your objective is to show the bank that, at the end of your projection period (typically thirteen weeks but sometimes as long as six months), the bank will be no worse off, and hopefully somewhat better off, than it is at the start of your projection period.

In the short term, you will have to tighten up — most likely starting by making payments to lower your outstanding balances. You will have to give the bank comprehensive and accurate reports on the steps you are taking. The bank will want to see that you are reducing expenses and accelerating collections. You may have to streamline procedures and eliminate less profitable components of your business.

It is inevitable that stresses will develop as you work out these issues with your bank. Even if your plan is successful and your business emerges in a stronger position than it was before, you may feel that the relationship with your bank will never be the same. Keep in mind, too, that the bank may be feeling the same way about your business. When a bank develops a case of “lender fatigue,” it may begin delivering messages, subtle at first, that it wants to show you the door.

In these circumstances, it often makes sense to look into establishing a new relationship with another bank. No two banks are exactly the same, so you may be a better fit with another lender. Keep in mind, too, that the economic recovery we’re all hoping for is still in low gear, so banks that are looking to build their portfolios are doing so by latching on to their competitors’ accounts.

So, if your business is headed into workout, don’t panic. If you heed your consultant’s advice and communicate openly with your bank, workout can work out to your benefit.