In today’s turbulent economic times,most businesses are facing challengesregarding their ability to maintain the terms of their existing credit facilities.
“If you own or run a business, chances arethat the credit crunch has already affectedyou and your business,” says Jim Stief, amember of McDonald Hopkins LLC’s Cleveland office and chair of its commercial finance practice.
“Your lending institution very possiblymay have changed the way it looks at newand existing lending relationships. Perhapsyou’re concerned about your ability to keepafloat in the near future. Perhaps you’vealready violated one or more of the terms ofyour credit facility and are struggling just tokeep your head above water.”
Stief describes three types of callslawyers are currently receiving from commercial banking clients regarding theircredit facilities — the “what’s going to happen to my lender” call, the “we’re headedfor trouble” call, and the “we’re in deeptrouble” call.
Smart Business asked Stief how he advises clients in these scenarios.
Some business owners are worried about thefate of their lenders. How do you respond?
Above all, don’t panic. Despite stockprices that fluctuate dramatically on almosta daily basis along with constant rumors ofpending mergers and acquisitions, it’s notsurprising that many businesses worryabout their lenders. I won’t say that thisanxiety is completely unfounded; however,even if a bank is acquired or merged intoanother bank, the day-to-day managementof each company’s credit by its relationshipmanager usually won’t change.
I’ve seen many mergers and acquisitionsamong lenders, and, for the most part, therelationship manager and the team thatservices a company’s credit facility staysthe same. As any company that has anexisting relationship knows, the name onthe building is important, but the quality ofthe relationships with the individuals whowork for the lender is what really matters.To keep abreast of current developments,businesses should feel free to call their relationship managers. Relationship managers welcome the opportunity to provide guidance and reassurance to their borrowers.
What if a company knows it is headed fortrouble and may not be able to keep up withthe terms of existing credit agreements?
Keep your lenders informed! Keep theminformed of not only past results but also ofexpected results, both good and bad.Additionally, if you expect bad results, letyour lenders know in detail what causedthose results and what specific actionsyou’re taking to avoid future poor performance. In other words, be proactive. Lenders,like most people, don’t want to be the last toknow when something doesn’t go asplanned. Whether it’s poor financial results,the loss of a good customer or the loss of akey employee, lenders want to stay in theloop. If you try to hide information or delayinforming the lender about these types ofsituations, the lender will get frustrated andalmost certainly make life more difficult.
I find that lenders, even in this environment, still try to accommodate companiesthat do a good job of communicating, especially if that communication includes solutions to any existing or potential problems.
On the other end of the spectrum, lendersare very reluctant to extend any specialaccommodations to those companies thatdon’t communicate, because lenders fearwhat they don’t know.
What if the company has already defaultedon the credit agreement?
If you are like many companies out there,this has already happened. Depending onthe severity of the event that caused thedefault, and assuming that you have done agood job of communicating with yourlender, your lender, even in today’s market,may want to continue to work with you.But, there’s also a chance that it won’t.
In any event, there likely is a short windowof time from when a company defaults onits credit agreement until the lender mustmake a decision to keep the credit or pushit out. Any company that reaches the pointat which it has violated or is likely to violatethe terms of its credit facility, especially violations of financial covenants, should immediately consult with competent legal counsel that specializes in commercial lending.
What happens next for a company that isseriously in default?
Say you’ve violated a material term of yourcredit agreement and the lender has askedyou to exit. If you haven’t met with counselexperienced in commercial lending relationships, you should. These attorneys can helpyou manage and possibly maintain the current lending relationship, or help yousmoothly transition to a new, more suitablerelationship. If your relationship with yourlender has soured, this lawyer will work to‘mend fences’ with your lender to make thenext step less painful. When you do need tofind a new lender — and in some cases,depending on the complexity of the situation, this may involve locating an investmentbanker — legal counsel can help you find theright match. Unfortunately, I’ve seen distressed yet viable companies end up in fore-closures or bankruptcies because they didn’tseek professional help soon enough.
JIM STIEF is a member of McDonald Hopkins LLC Cleveland office and is the chair of its commercial finance practice. Reach him at(216) 430-2031 or firstname.lastname@example.org.