Get closer to your bank

Excerpt reprinted with permission from The Credit Crunch: a Practical Guide, Grant Thornton LLP, 2008


What’s the issue?
Given the current state of the credit markets, banks will be a lot more cautious and concerned about credit quality. As a result, they will need greater persuasion to lend you money when you need it. Borrowing will likely come at a higher price, both in terms of interest rates and fees, and will almost certainly include more restrictive covenants and require increased monitoring and transparency. In many industry sectors and regions of the country, new lending will be severely restricted, and you may struggle to refinance existing credit facilities. Banks are increasingly focused on the quality of their loan portfolios, and their key concern is loan recoverability. You can expect a lot more scrutiny from your loan officer and a lot less latitude and flexibility. The “watch list” of accounts is constantly building in all banks, and there’s an appreciable increase in the activity of their “special loans” groups, whose main focus is on loan recovery.

What can you do?
Treat your bank as a partner in the business. Keep them informed and help them understand your business, your industry, and competitive dynamics. Tell them how you plan to deal with the new economic challenges and be sure to give them plenty of notice if you need help. The last thing a bank wants is to receive a week’s notice that you need to double your line of credit. Proactively manage your relationship with your lender. Banks make money by lending money—they want you to prosper so they can continue to lend you money. And regardless of the prevailing credit squeeze, Canadian banks will likely adopt a policy of “drip-feeding” businesses with good fundamentals that are caught in the current economic slowdown.

If you do need to go back to the bank for help or additional borrowing, discuss the best approach with your advisers. In many instances, getting your bank to work with you has a lot to do with how you ask for their help. Even if your business prospects are changing adversely, you’ll be better off being the one to tell the bank. But have a well thought out plan in hand when you arrive. In today’s credit environment, it’s going to be critical to understand prevailing financing structures and terms.

What to avoid?
Don’t fall into the trap of thinking that it’s up to the bank to guide you through any issues or problems. If you talk to your bank early enough, they may be a lot more open-minded in working through problems with you; however, be very clear that the ultimate responsibility for resolving any issues falls squarely on you and your management’s shoulders.
Do your very best not to breach any covenants in your loan agreements that might trigger a technical default. Also, do your very best to stay current on your debt. In the end, you are trying to ensure that your company has the financing available to operate the business effectively. You will clearly want to avoid having your lines of credit restricted, having any demand loans called, finding your way into the bank’s “special loans” group, or being forced to enter into a restrictive and expensive forbearance agreement.