“The only sure thing you can stay about a bank is that they will give you all the money in the world when times are good and the second you have a down-turn, they rip the rug out from under you.” This is one of the most painful sentiments that I have ever heard. Unfortunately I have heard it numerous times in my banking career. I completely understand the reason why frustrated entrepreneurs often feel this way, I believe this statement is revealing of one of the greatest fears that entrepreneurs have when dealing with banks. To phrase it another way, would be to say that banks (bankers) promise to be your partner when times are good (ie. strong cashflow, more than enough reserves), but when I really need a partner, banks (bankers) quote government regulations or lending policies as an excuse to cut off the support they give me.
After being a banker for over 13 years, I have had the pleasure to walk through some amazingly difficult and tough times with some clients. I say that it was a pleasure to walk through the dark times with them, not because it was enjoyable, but rather because I was able to see firsthand the grit, ingenuity, and integrity of some of the most amazing and strong entrepreneurs that I know. What is more, is that I also was able to PROVE myself as a partner as they went through an extremely dark time in their entrepreneurial journey.
This article is meant to explore some of the key lesson that I learned through these experiences. My hope is that it will empower entrepreneurs, and their bankers, to have deeper conversations, so that in the event of a down-turn, both are prepared to stand together.
1. Early Communication. Most entrepreneurs meet with their banker only when (a) they have a question about a service/ fee (b) when they have a loan need or (c) when it is time to play golf, go fishing, or to an event. I place most of blame for this surface level relationship on the banker. Entrepreneurs are extremely busy people and bankers need to realize that part of their role in the partnership is to take the initiative and get on the entrepreneur’s calendar for meaningful meetings on a consistent basis. However, if there is a problem, then I would recommend that the entrepreneur make sure to communicate this early with their banker. Bad news, like fish does not get better with time. Letting your strategic team know what is going on as soon as you see an issue (or a potential issue) is wise. Not only does this bring another set of eyes into the situation to assess the problem and potential solutions, but it increases the flexibility of what the bank can do to support you. For example, in one of the difficult situations that I walked through, I was brought up to speed on the problem very early (before the problem was critical) and I was able to modify the client’s loans to interest only payments for 6 months while the client developed their strategy. This allowed the client to have less stress on their cashflow and gave them the flexibility they needed to resolve the issue.
2. Develop a plan. Ok, so you brought your banker into the circle of trust (hopefully they have been in the circle well before when things have gone bad), so what do you tell them. It is simple, after summarizing the issue, lay out your plan to include timeline, resources, key players, and critical measurables. After you have laid out your plan, you need to set in place a consistent time to provide updates and feedback. In one instance, I had weekly meetings with a client to get updates on their progress and provide support and encouragement. My client saw me as a member of his key leadership team, and as such, I met with him and all the other senior level leaders on a weekly basis. The plan you develop should be for your benefit (not your banks); but this is extremely vital that you share this with your banker.
In most banks, your banker is not the person that can make the final decision on how the bank is willing to modify existing loan terms (especially if you are having trouble). This plan is the ammunition that your banker needs in order to convey to the person making the decision (a person which, until recently, most likely never even knew your business existed) that you understand the issue and that your plan is the best path forward. I have heard a story about how one client was experiencing difficulties because of a drastic change in regulatory oversight. They made the difficult decision to sell the company as they did not have the capacity, capital, or expertise to deal with the regulatory changes. Their banker was able to restructure their loans to give them flexibility to go through the sale process. This particular banker went so far as to meet with the investment group during the due diligence process and provided critical information that allowed the transaction to go as smoothly as the circumstances allowed.
3. Identify your contingency plan. As all entrepreneurs know, nothing is for certain, and you should not assume that the plan you developed to get you through the problem will go 100% as planned. As you do in your daily operations, you should be prepared with contingency plans in the event some of the assumptions you make do not work out. The best contingency plan I saw was for a retail company that had come under extreme competition over the last 2 years. When I was briefed on how the company was going to work through the problem, the owner asked me to stay after his leadership team left the room. He then shared with me a detailed contingency plan that showed specific expense reduction measures that would take place if the company failed to meet their projections in 3, 6, 12 and 18 months. This was extremely detailed, to the point that he even identified the specific individuals that would have to be let go at each stage. Luckily, the company was able to work through the problem and the 3 people that they did have to let go, were rehired within 6 months.
4. Realize the bank is not in the real estate, inventory liquidation, or vehicle sales business. I have actually had a few clients tell me (in jest) that the bank would want them to default on their loan because the collateral they have is worth so much more than what they borrow. I want to point out that the reason the bank takes collateral is to protect its shareholders from the potential of loss. The bank is in the business of serving entrepreneurs and clients, they would prefer not to have to deal with liquidating collateral, as this is a costly and expensive process. Unfortunately, there are times that the collateral must be sold in order to pay the bank back. When my clients joke with me about this, I gently remind them that (a) I would not have approved their loan if I thought that it would end in the bank taking the collateral back and (b) even if the bank has to liquidate the collateral, all it can recover is the amount owed and the cost of recovery. Any cash received above that will be passed along to the owner. Remember, the bank does not want to go through the liquidation process, and as a result, most of the time they will do everything in their power to help the entrepreneur through the difficult situation.
Having said all that, the entrepreneur should not be surprised that during this time, the bank may take a very hard look at the collateral that is currently securing the loan. This assessment may lead them to believe that there is a potential for loss, which may lead them to require additional collateral be pledged. I know that the requirement to add additional collateral may feel like the bank is being greedy or that they don’t trust you. But remember, the reason the bank takes collateral is to protect its shareholders; and you may not like it, but that is the position they are coming from.
5. Honest communication. Honesty is a two-way street and never is that more critical in the entrepreneur/ banker relationship than during a difficult situation. Sugar coating the truth, while it may avoid difficult conversations, never helps. Entrepreneurs should push their banker for clear, definitive feedback along the way. They should ask what specific measures the bank looks at to assess the risk of the situation, where the bank feels it is exposed, and what the bank’s policies and limits are. This will allow the entrepreneur to assess the situation with as much pertinent data as possible and develop a plan that is acceptable to them and the bank. Afterall, it would be hypocritical of me to ask the entrepreneur to bring their banker into the circle of trust and not expect that to be reciprocated.
One other tip that I would give the entrepreneur would be to meet with your banker’s boss and if possible (at the very least via phone), meet with the actual person that makes the credit decision for loans that are struggling. This may not always be possible, but the more that you can build a relationship with the ultimate decision maker, the more you can build your team to help you through this time.
This has been one of the most difficult articles that I have written because if a business is in trouble, then it means that an entrepreneur’s dreams and hopes are in trouble. The value of any person is never determined by their success or failure at business, but when times are difficult, it is sometime hard to remember that. However, this time can also be a time of amazing grit, resiliency, and ingenuity. I would never wish difficult times on any entrepreneur, but hopefully this article can be a small bit of encouragement and provide a few tips on how to deal with this difficult time.
Being an entrepreneur is one of the most difficult and demanding things you can do. The good news is that entrepreneurship today is a team sport. Hit the connect button on LinkedIn or Facebook NOW and together we will start maximizing your profit, strengthening your leadership skills, defining your strategic vision, and transforming your bank into a strategic partner. When we connect, tell me if you have ever gone through a difficult time and how your banker responded.
Greg Martin is an entrepreneur’s insider to the banking industry and passionately believes that every person was uniquely designed for a higher purpose and calling. Greg guides entrepreneurs in defining and achieving their purpose and calling. His deepest passion is living life with his wife and their wonderful son.
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