Will My Bank Support Me?

When a business is in difficulty, maintaining the support of its bankers or other lenders is normally critical for it’s survival. This article looks at how the bank business support units, or bank intensive care units or specialised lending services (or other lenders) make this critical decision and what steps a business can take to make itself as supportable as possible. Click here for specific information on dealing with an Independent Business Review (IBR).

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A business in difficulties has to understand its bank’s perspective in considering the risk it will run in continuing to support it. After all, it takes a lot of interest income from loans to other customers, at a few percent over the cost to the bank of borrowing the money, to claw back the value of a loan that goes bad.

In deciding whether to continue to support you, the bank will have to judge its confidence in your ability to use that support and to turn the situation around at a time when, particularly if your business has reached a crisis, its confidence in you is likely to be significantly reduced.

To help justify support you will need to take action to demonstrate that you know and are in control of what is happening in your business, such as robust cash flow forecasting, and that you can take tough decisions, such as cutting costs or staff if needed, to restore the bank’s confidence.

But even if the bank has confidence in your integrity and abilities, if you need to turn your business around, it is by definition in some kind of trading difficulty. So, you should ask yourself, if you were a bank, how keen would you be to lend your money to a business in difficulty? What questions would you ask?

The good news is that, despite how it might feel, your lenders do have an interest in your survival. After all you are their customer and so you are the source of the income that pays your bank manager’s wages. So lenders will tend to support customers in difficulties where:

the lender trusts your integrity;

you talk to them in time, and seem likely to continue to talk to them;

you seem to be in control of your business, and its numbers;

you have a plan;

the plan sets out clearly what support you need, how much, for how long, and how it is to be repaid;

you are prepared to get in help where you need it;

the lender is confident your plan can work;

the lender is confident you can make it happen; and

your plan does not materially increase the lender’s risk.

This last point is concerned with the current level of the lender’s security and the simple questions:

Can the lender currently get out or not? and

How does your plan affect this ability going forwards?

A full estimate of a lender’s security position can be a complex matter, requiring specialist assistance in the valuation of assets and assessing reservation of title clauses.

For the purposes of most business situations however, you can reach a reasonable approximation of the bank’s position by looking at the value of your property and a discounted value of your debtors, say 70%, to approximate what might be recovered in an insolvency, compared to your level of borrowings. If your business has plant and machinery of significant value you will need to in the realisable value of this as well.

This should allow you to estimate how confident of getting its money back, or how exposed about its lending, the bank will feel, before you speak to them about the support you want.

You can then roll this calculation forward based on your forecast balance sheet and cash flow to see how your plan will affect the lender’s security position.

By understanding whether you are asking them to become more exposed or if your action will help them to improve their position, you can help to tailor your approach to them to ensure their support and anticipate their requirements. Of course these days a business may not have a simple single bank funding position. Many companies may, for example, have a factor or invoice discounter providing funding against the debtors, while another lender provides a mortgage on the property. In this type of situation separate calculations will be necessary to see the position of each funder.