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@example.com or (330) 384-7807.