In a world full of negative economic
news, many business owners are fearful
of what reporting bad news to their
banks will mean for the future of their
banking relationship and, ultimately, their
businesses.
“Today’s economic circumstances
require that communication with your
bank be timely, direct, open and frank,”
says Nicholas Browning, president and
CEO with FirstMerit Bank.
Business owners should not fear reporting bad news to the bank but they must be
realistic about potential changes the bank
may insist upon, says Browning. Banks
understand that no one likes to have to give
bad news but they would rather have the
information as soon as possible so they can
help you develop a plan to deal with the
problem and move forward.
Smart Business spoke with Browning
about how business owners should communicate with their banks during difficult
times.
What causes difficult discussions between
banks and consumers?
Banks and borrowers sometimes do not
see eye-to-eye when the customer’s business has veered astray from the original
business plan, as well as from historical
results, both of which the bank used to
make their loan decision. When the bank
determines that this new information has
changed the risk assessment of the loan
then the terms of the loans will likely
change. This may be unnerving or upsetting to business owners but in most cases
it does not mean the end of the relationship. Banks are trying to modify the terms
to return the risk profile to the same place
it was at loan inception. These changes
may include adding a personal guarantee,
changing covenants, adding collateral to
support the loan or a change in pricing.
What might this conversation between the
bank and the business owner sound like?
If earnings and/or cash flow are below
historical levels and below your plan, your
banker will be interested in three things:
how it happened, how it’s going to be fixed and when it’s going to be fixed. The prepared business owner will have a detailed
analysis of the causes of changes in earnings, including data on sales, margin and
expenses. The plan to remedy the current
situation is equally important; what’s being
done to return the company to its history
or projected profitability? Of course, all
plans cover a time frame and the timeliness
of the turnaround actions is important.
Your banker will then assimilate this
information and make a recommendation
to management. Your banker is your advocate within the bank, so make sure he or
she is prepared to accurately and effectively understand and communicate the circumstances. The banker will then tell you
how he or she would like to address the
situation.
What if I don’t like what I hear from my bank?
As previously stated, your bank may propose changes of terms and conditions
under which they will continue to lend
money to your business. You may not like
the proposal. First, understand that relationships are supposed to be give and take.
Things didn’t go as planned; consequently, the bank wants to make changes. At the
most basic level this is fair. In the vast
majority of cases, neither party likes the
circumstances but they find a tolerable
middle ground. At times, however, the
bank may take a very hard stand and will
not budge. Conversely, I’ve seen borrowers
do the same. These are the most difficult
situations which cause the most disruption
for the bank and the borrower.
Exacerbating the current times is the
unprecedented upheaval in the banking
market. Many banks have had capital pressure due to loan losses and asset write
downs; these bankers may be less flexible.
Further, the ‘economic crunch’ has caused
the ‘credit crunch,’ so many banks have
become less tolerant of perceived risk.
As always in a free market, if you don’t
like what you hear from your bank you can
always talk to other banks for a free assessment of your situation. Depending on the
circumstances, you may find another bank
interested in acquiring your business.
How should business owners keep lines of
communication open with their bankers?
This communication is a two-way street.
During challenging times, more communication is better than less. Monthly meetings
are often helpful, as the bank is kept up to
speed at regular intervals while business
owners are able to get real-time feedback
from the bank.
What is the bank’s responsibility in the communication process to its consumers?
It is the same as the borrowers. Banks
owe their customers timely and straight
answers to their questions and clear direction of how the bank will proceed with the
relationship going forward.
Any other thoughts on this topic?
No matter what, be patient. Tough times
often require steady perseverance to get
the best outcome.
NICHOLAS BROWNING is president and CEO of FirstMerit Bank’s Akron region. Reach him at [email protected] or
(330) 384-7807.
