Understanding there are times when, in order to avoid any undue anxiety, you cannot tell the whole story to anyone outside of the company,* it is critical to maintaining the availability of capital that the information given to the bank(s) be as complete and accurate as possible. Do not wait until after the fact to give your banker bad news. Bankers DO NOT like surprises – if you think about it, not many people do. Also, it is possible that with enough notice, the bank might be in a position to help avoid or certainly mitigate the ultimate outcome of a difficult situation. Remember, you have the bank’s money, if they want it back (and they do), they will do whatever they can to help you resolve problems if they trust you. If they feel you are not trustworthy, difficulty in the business could (and most likely will) result in termination of the relationship. An untimely cancellation of funding could place the company in a very dangerous operating position.
You must know the lender does not necessarily have to wait until a default actually occurs to begin to take action. Even if the loan agreement remains in place and the funds are technically available, if the lender feels the loan is being compromised they may begin to protect their position. Certainly there are stated remedies that are available to manage the situation when covenants are in fact broken, but there are also certain options that exist before a default occurs. Although it is impossible to identify every potential action, a partial list of steps that might be taken prior to a default could include:
- the request for additional (and onerous) reporting,
- a forced reduction of the available credit line,
- a refusal to honor requests for additional advances,
- or possibly continuous pressure for corrective action.
These actions can severely limit the availability of additional capital and will be a serious distraction at a time when all your attention should be on operating the business and solving problems not managing the banking relationship. The situation becomes even more problematic if the relationship was not managed properly prior to the difficulty in the business.
Profitable companies successful in managing cash flow generally are considered low credit risks and that’s generally reflected in a more positive banking relationship. This is just another reason for initiating a relentless focus on profit management. The better your historical profitability the better the interest rate will be on loans to the company. Consistency is the key.
*Add a knowledgeable insider to your team and put razor-sharp focus on profitability. Talk to The Profit Experts.
