Communicate effectively with your lender.
November 2017 Vol. 6 No. 11
Hello,
In business, surprises are rarely a good thing. When they are severe enough to create a crisis for your company, it's important to communicate effectively with your lender.

Today's newsletter offers four specifics for doing this well.
Regards,
Charlie Goodrich
Founder and Principal
Goodrich & Associates
In this issue...
Crisis Communications: Four Tips For Managing Your Lender

Bad surprises happen. Sometimes they are financial surprises or set backs that create a liquidity problem. Other times they are operational or customer driven. Whatever the cause, surprises can create a crisis for your company - and maybe your lender, too. Your lender shares in the crisis if it threatens your liquidity, business viability, or ability to otherwise pay back the loan. Not surprisingly, the way in which you communicate with your lender during a crisis matters.

In prior newsletters, I have written about the importance of maintaining credibility with creditors. This group includes lenders too, of course, however it's important to bear in mind that lenders are not just any creditor. They have legal remedies in the credit agreements in addition to (often) having liens on your assets and control of your cash. Not surprisingly, your lenders want to be paid back somehow, sometime.

When one of their borrowers has a crisis, lenders ask themselves a number of important questions. Among them: Will the loan still be repaid according to terms? Is the collateral securing the loan impaired? Has the risk profile of the loan changed so much that the loan is no longer an acceptable risk?

Your challenge, in a time of crisis and relative to your lender's concerns, is to answer their burning questions and (to the extent possible) put them at ease. It's critical, therefore, to ...
  • Communicate early. When you are faced with a crisis your lender should hear about it from you, first. This is not something you want them to learn about in the press, on the Internet, or secondhand through one of your customers. It's also important that your lender be brought up to speed before they see signs of duress, such as a lack of liquidity, delayed financial reporting, or financial reporting that, while timely, reveals a crisis at hand.
     
  • Communicate honestly. Usually, once a lender no longer trusts you and your company, they want out. Half truths, deliberate obfuscation, and, of course, outright lies will end the relationship with your lender quickly. 

    Note as well that your lender's trust in you is a combination of your honesty and your credibility to rectify the problem (see 3/2017, 1/2014). But they are not the same thing. An honest idiot (for example) is not credible. If your actions make a lender doubt you have the wherewithal to fix the situation, they may believe you, but they won't trust you with their money.
     
  • Communicate thoroughly. While it's important to communicate with your lender early, unless the situation is dire, make sure your ducks are in a row when you do. 

    Not long ago, for example, an attorney called me with an urgent request. A long time client said he needed to file for bankruptcy by the end of the week! So, I met the attorney at the client and assessed the situation for him. While it's true that the business owner was about to default on a construction loan on a side investment, he had lots of options and additional collateral to rectify the situation. By laying out the situation with his lender - along with a proposed solution - a crisis was averted. 

    Ideally, before talking to your lender, get your arms around the situation with a though assessment, action plans to fix the situation, and financial projections to evaluate the impact. Help your lender understand his/her exposure with projections that show just what the risks are. Will cash be constrained and outside funding needed? Will collateral be impaired? Are covenants at risk? If the crisis wasn't foreseeable - particularly if it was not financial in nature - and you are comfortable with your finance department's capability, go ahead and use them. Otherwise, get outside help.
     
  • Communicate confidently. Several years ago, I helped a fast growing company get out of a liquidity crisis. Vendors were stretched and many salaries had been deferred (not just the owners, but trusted management too). The financial statements were compiled and reviewed (kind of) by a single-shingle CPA known to no one but the owners. The senior lending officer told me he liked the company and liked the owners, but unless things changed, the loan needed to go. 

    I developed the first set of credible financial projections for the company: a real 13-week rolling cash flow and two-year projections that besides forecasting the income statement and balance sheet, forecast real cash flow and the relevant ratios in the loan covenants. I also brought on a regional CPA firm that was engaged to audit this year's balance sheet and all of next year's financial statements. In short, because a detailed plan was laid out that was backed up with the credibility of an outside firm, the lender had confidence in my client's ability to meet its commitments. 

All crises are not created equal

In addition to the specifics outlined above, it's important to remember that the origin of the crisis at hand will also have an impact on how the lender views your situation.

If the crisis should have been foreseeable, the lender will be concerned about what else you haven't anticipated that may be coming next (e.g., running out of cash, surprise losses, etc.). In this case, you should use outside help to both improve your forecasting and to provide credibility to the lender about your plans to recover.

If the cause of the crisis was preventable, the lender will want to see fixes put in place to block a reoccurrence, as well as understand which other aspects of your business are not up to par and may be the source of future problems.

In both cases, your company wasn't doing some things it should have - this will need to change and that change needs to start now. Preventing future problems by changing people and practices tells the lender you understand that the problem shouldn't have occurred and will not again, thanks to your taking needed actions.

Conclusion

Surprises in business are rarely a good thing. When they are severe enough to create a crisis for your company, it's important to communicate quickly, honestly, thoroughly and confidently with your lender.

Doing so won't guarantee your survival, of course. That said, by keeping your lender in your corner as much as possible given the circumstances, you'll maximize your chances of financial success.
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About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity 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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