In times of economic distress, business models need to be challenged. We’ve seen this happen recently in the retail, manufacturing, engineering and mining services industries. In the Hunter Valley a number of mining services businesses are going through an intense period of cost reductions, capital management pressures and structural changes.
In these situations, companies can find themselves in a delicate and challenging financial situation. One of the keys to managing this situation is for management to have a good relationship with the company’s bank or other financier.
Too often we see companies with loan facilities in default (or likely to default in the near future) manage the relationship with their bank poorly. Fearing the bank won’t help them get through these challenging times they try to:
- conceal financial information
- avoid telephone calls
- miss deadlines to lodge financial reports without any explanation.
Having a bad relationship with the bank will only cause more trouble, and most likely put more pressure on the company’s financial situation.
When a bank is concerned about a company’s loan facilities, it usually sends the file to the bank’s Asset Management or Loans Management division. These divisions deal exclusively with loans with an increased element of risk due to the borrower either having a downturn in performance or breaching its loan covenants. (Accountants commonly refer to these divisions as “the bad side of the bank”.)
When it comes to dealing with the company’s loan facilities, the decision is often taken out of the local business banker’s hands and given to someone else entirely. The bank may appoint an investigative accountant to act on its behalf, analyse information and provide recommendations to the bank. In such cases the costs are borne by the company and sometimes debited to its existing banking facilities.
But they are not the enemy. The person dealing with the loan is just doing their job and should go about their duties professionally. The bank is simply trying to ensure its loans are serviced on time and its facilities repaid.
Our recent experience with banks suggests they’re now less inclined to call in loans in the current market than they were in previous financial cycles. Current asset values are quite low, and banks have been more willing to help a well-managed business work through its financial troubles. It may also be a case of having fewer risky loans placed since the GFC, resulting in a smaller amount of bad debts.
Here are seven tips for dealing with a bank’s Asset Management or Loans Management division.
1. Seek expert advice. A skilled and experienced adviser will know what the bank and its advisers want, and be able to communicate this more effectively.
2. Accept the situation and work with the bank and/or the investigative accountant. A company that defaults on its loans is rarely in a strong position to bargain with the bank.
3. Be honest. A bank likes certainty and predictability. The last thing it wants is a surprise, particularly a bad one. When communicating with the bank be factual, and don’t withhold information no matter how bad it is.
4. Deliver an achievable plan. While the business owners may be willing to take more risks to avoid losing everything, the bank will try to reduce its exposure to risk as much as possible.
So naturally when you talk to the bank they’ll want to see:
- the business’ true current financial position, and what the future holds
- how the underlying problems that put the business in this position have been resolved
- a plan to minimise the risk of future financial distress
- how the business intends to recover from the situation
- how the business intends to repay the bank.
You’ll also need to clearly present your plans for the future, complete with milestones and objectives.
5. Communication is key. Deliver the information clearly and precisely to reduce potential misinterpretation and confusion. Don’t ignore the bank and hope the problem goes away. Don’t threaten them, or try and go over the head of whomever you’re dealing with. Don’t ask your old relationship manager at the bank for support as once the loans are transferred to the Asset Management division, the local banker has no influence over the situation. Instead, maintain a good working relationship with the bank and keep the communication channels open.
6. Prepare your client emotionally. Talking to the bank will be a very confronting and stressful process for your client. After all the blood, sweat and tears they’ve channelled into building the business, they may feel they’re completely at the mercy of the bank. You need to tell them not to take it personally, and to try and leave the emotion out of the situation (as hard as that may be).
7. Have Plans B and C. Look for alternative sources of funds as a backup plan. Some banks aren’t keen on lending to particular industries, and may want to end their funding relationship.
At Rapsey Griffiths we understand every business and every industry is different. Both Mitch and Chad have acted for ‘both sides’ in the process: For banks as Investigative Accountants, and also for companies when their loans have been placed with Asset Management. This means we understand how banks prefer to work through challenging financial situations with their business clients and how to reach an outcome that is in the best interests of the company and the bank.
If you have a client who needs our expert advice, feel free to call or get in touch with Mitch or Chad at any time.