Despite efforts by our government, the lending environment has not changed. Most businesses continue to face challenges regarding their ability to maintain the terms of their existing credit facilities.
“If you own or run a business, chances are the credit crunch continues to affect you and your business,” says Jim Stief, a member of McDonald Hopkins LLC’s Cleveland office and chair of its commercial finance practice. “Your lending institution very possibly may have changed the way it looks at new and existing lending relationships. Perhaps you are concerned about your ability to keep afloat in the near future. Perhaps you have already violated one or more of the terms of your credit facility and are struggling just to keep your head above water.”
Stief describes three types of calls lawyers are currently receiving from commercial banking clients regarding their credit facilities — the “what’s going to happen to my lender” call, the “we’re headed for trouble call,” and the “we’re in deep trouble” call.
Smart Business spoke with Stief about what you can do if you find yourself in one of those scenarios.
Some business owners are worried about the fate of their lenders. How do you respond?
Above all, do not panic. Despite stock prices that fluctuate dramatically on almost a daily basis, along with constant rumors of pending mergers and acquisitions, it is not surprising that many businesses worry about their lenders. I will not say that this anxiety is completely unfounded; however, even if a bank is acquired or merged into another bank, such as the merger of National City into PNC, the day-to-day handling of each company’s credit by its relationship manager usually will not change.
I have seen many mergers and acquisitions among lenders and, for the most part, the relationship manager and the team that services a company’s credit facility stays the same. This has been the case with National City. As any company that has an existing relationship knows, the name on the building is important, but the quality of the relationships with the individuals who work for the lender is what really matters.
To keep abreast of current developments, businesses should feel free to call their relationship managers because they welcome the opportunity to provide guidance and reassurance to their borrowers.
What if a company knows it is headed for trouble and may not be able to keep up with the terms of existing credit agreements?
Keep your lenders informed! Keep them informed of not only past results but also of expected results, both good and bad.
Additionally, if you expect bad results, let your lenders know in detail what caused those results and what specific actions you have taken to avoid future poor performance. In other words, be proactive. Lenders, like most people, do not want to be the last to know when something does not go as planned. Whether it is poor financial results, the loss of a good customer or the loss of a key employee, lenders want to stay in the loop. If you try to hide information or delay informing the lender about these types of situations, the lender will get frustrated and almost certainly make life more difficult.
Even in 2009, I find that lenders still try to accommodate companies that do a good job of communicating, especially if that communication includes solutions to any existing or potential problems.
On the other end of the spectrum, lenders are very reluctant to extend any special accommodations to those companies that do not communicate because lenders fear what they do not know.
What if the company has already defaulted on the credit agreement?
If you are like many companies out there, this has already happened. Depending on the severity of the default, if you continue to communicate with your lender, there is still a good chance, even in today’s market, that the relationship will survive. But, there is also a chance that it will not.
In any event, there likely is a short window of time from when a company defaults on its credit agreement until the lender must make a decision to keep the credit or push it out. Any company that reaches the point at which it has violated or is likely to violate the terms of its credit facility, especially violations of financial covenants, should immediately consult with competent legal counsel that specializes in commercial lending.
What happens next for a company that is seriously in default?
If you have violated a material term of your credit agreement, it is likely that the lender has asked you to exit. If this happens, you should seek the advice of an attorney who can help you manage and possibly maintain the current lending relationship, or help you smoothly transition to a new, more suitable relationship. If your relationship with your lender has soured, your attorney will work to ‘mend fences’ with your lender to make the next step less painful. Unfortunately, I have seen distressed yet viable companies end up in foreclosures or bankruptcies because they didn’t seek professional help soon enough.
JIM STIEF is a member of the McDonald Hopkins LLC Cleveland office and is the chair of its commercial finance practice. Reach him at (216) 430-2031 or [email protected].
Jim Stief
Chair, commercial finance practice
McDonald Hopkins LLC
