The credit crunch continues to squeeze the supply of capital. Combined with the economic downturn, this means that lenders continue to take a much more cautious stance, especially with underperforming companies. Companies needing to refinance or obtain waivers and amendments to existing finance arrangements are facing an unpredictable response from their lenders, even when the relationship has historically been strong. Fearing the worst, some private company leaders are shying away from proactively communicating with their bankers.
The good news is that dealing with your banker—even in this economy—doesn’t have to be a nerve-racking experience. “A number of companies fail to view their bankers as partners, but they in fact are,” says Vince De Luca, former Managing Director of the Corporate Finance Practice at PwC. “It’s in the bank’s interest to see the companies they deal with succeed. At the same time, the reality is that we’re experiencing a severe downturn that’s affecting every industry and sector—and the likelihood is that some businesses will face financial challenges.” While banks always need to be cautious, they are protecting their capital during this downturn by managing risk. Business owners who can demonstrate to their bankers that they are forthcoming and proactive—that they have winning plans—can potentially avert being squeezed by the credit crunch. Here’s how to do just that:
Stay in touch
Trust is a two-way street
Unlike public companies that disclose detailed reporting and strategy on a quarterly basis and discuss it with financial analysts, private companies tend to be, well, very private. “They’re generally not accustomed to communicating timely and detailed information or business strategy to anyone outside their business—and sometimes, depending on the size of their loan, this includes their bankers,” says De Luca. “In today’s climate, it’s vital that you are as candid and forthcoming as possible with your banker.
Do your homework
Communicate your new focus
Bankers expect to see that management teams have shifted from a sales growth orientated focus to a capital preservation mode. “We have seen numerous examples of late, where the subject companies did not adjust their production and purchasing behaviours despite the fact that sales were significantly decreasing. These actions, or lack thereof, resulted in drastic increases in working capital and covenant breaches,” says De Luca.
And finally, you have to lead the way
“If you do run into financial difficulty, you want to be able to manage your business and your relationship with the bank. You don’t want the bank to manage you; bring the problem and your solution to them as soon as possible. Time, and enough of it, is one of the most important factors in dealing with any issue—especially a financial one,” says De Luca.
|Let's Talk: Dealing with your Banker (60 KB)
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