|With Creditors, Honesty is Always the Best Policy|
Like it or not, trust is the foundation upon which credit is built.
Yes, there's a business transaction that results. But without a belief in you and in your company's ability and intention to pay the debt, credit is destroyed. So what kills trust?
Lying. Misleading. Repeatedly making promises and commitments that are broken or not honored, for any reason. The usual suspects.
In distressed situations in particular, maintaining trust with creditors is essential. Here then, are four suggestions for keeping the trust:
- Be honest. "Bad" is when you tell a vendor that a check is in the mail when it really isn't. "Horrible" is when you doctor a transaction history so the lender will advance more funds. In both examples - and countless others - lying to a creditor will only come back to bite you.
Several years ago, for example, I was brought in as a crisis manager for a company that hoped to close on new working capital financing with a new lender. The company had defaulted on numerous forbearance agreements and the bank's auditors had found the company had been "refreshing" invoices. ("Refreshing" is taking an old past due invoice that lenders won't use as collateral to advance funds and giving it a new, current date so they will.)
The auditors for the new lender showed up at the end of my first week there and guess what they found? More refreshed invoices from the month prior to my arrival. The new lender passed on the credit and my client's only source of new funding was to turn to very expensive, "hard money" lenders - those which take liens on everything, including numerous personal assets of the owner.
- Be proactive (particularly with senior secured lenders). This means doing more than simply telling creditors before they figure things out for themselves; it also means advance warning for lenders with action plans to rectify the situation. Most lenders will work with a company in default as long as they trust those involved.
How much information to share and with whom and when? It depends. The more trusting and important the relationship, the more candor that needs to be shown - and shown earlier. Since senior secured lenders often provide critical financing - and because they usually have tremendous creditor rights, enough to destroy a business - early discussions are more needed here than with run-of-the-mill trade vendors or with junior or subordinated lenders.
Creditors that are suppliers of critical parts, materials or services, and with whom your company has a long and deep working relationship, should also be kept up to speed. Your relationship extends well beyond just paying them; don't destroy critical long-term partnerships by keeping these important folks in the dark.
And by the way, having reliable financial projections, particularly a 13-week cash flow as discussed in my May, 2013 newsletter, is critical in all of this. You can't be proactive if you can't see a problem coming. And you can't say with any certainty when a vendor will be repaid if you don't have a good handle on weekly cash flow. Destroying trust over time with broken commitments often stems from not knowing what you can commit to in the first place.
- Be discreet. Honesty and candor with key relationships is not synonymous with broadcasting your problems to the world. If a creditor (or employee) is unlikely to ever learn of your difficulties (or has no need to know just yet), don't say anything. The last thing you want is a vendor-driven "run on the bank," a situation in which fearful vendors tighten terms, exacerbating any existing liquidity crunch.
For many trade creditors, saying nothing until they start making calls for payment is the best course of action. But again, when they do call, don't lie - or worse, make a commitment that can't be met.
Credit is an essential part of operating a business and trust is the foundation of it all.
- Be realistic. Especially about the risks. When communicating with creditors, lay out the known risks in not meeting an obligation. For example, if you are counting on a payment from a large customer to fund paying a vendor, detail the risks when agreeing to a repayment plan. Often, when I come into a crisis situation, I simply tell vendors that, "I think we will be able to pay on date X, but I am new to the situation and don't yet know what I don't know." Don't destroy credibility by providing certainty when there is lots of uncertainty.
There are many known, uncontrollable elements. Disclosing the key uncontrollable elements to vendors mitigates the loss of trust when things don't happens as planned.
Be honest, proactive, discreet and realistic as you work with creditors. Most will respond positively to your straightforward and candid communication.
Heard on the Street
So what is ahead for the economy this year and forward?
Yesterday, I heard Jim Paulsen, Chief Economist for Wells Capital Management (part of Wells Fargo) speak. He predicts that real economic growth could hit 3.5% and that 10-year Treasury Bonds could yield 4%.
His thinking is summarized in his recent "Economic and Market Perspective."
Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent financial problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.
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