Article appeared in Accounting and Business Ireland 09/2010

In times of financial stress the prospect of approaching the bank for support can be daunting. The power in the borrower-banker relationship has shifted dramatically since the heady days of the celtic tiger and businesses often feel that they are at the mercy of their bankers. Banks that were eager to increase credit lines during times of plenty, have cut back funding available, making the juggling act a financial director performs close to impossible.

It is critical to remember however, that the survival of the business is crucial to the bank in recovering its loan. Approached in the right manner the bank can be a willing partner in supporting the business in trading through a difficult period.

So, what are the key steps in gaining bank support?

Be Proactive
Banks hate surprises. If the business is experiencing difficulties, make sure that the bank is informed early of the situation and kept abreast of plans to deal with it. If those plans include having to default on capital or interest payments to the bank, try to avoid taking this action without the agreement of the bank or at a minimum without their prior notification.

Develop a Robust Business Plan
All businesses should operate to a plan. When the survival of the business is dependent upon the support of its bankers, getting this plan right takes on an even greater degree of importance. The business plan presented to the bank is all the bank has to go on in deciding whether to support the existing management in recovering its exposure.

Key points to remember in preparing the plan are:
• It must be fit for purpose – if income has shrunk, costs must do likewise. This is the opportunity to show that the existing management team represents the best alternative in maximizing the value of the business.
• It must be realistic – this is not an exercise of fantasy to demonstrate how the bank debt will be repaid. If the debt is not repaid, it is not repaid. Be confident that no one else will generate more out of the business than the existing management.
• It must be measurable and achievable – banks like nothing better than tracking performance. The plan should be conservative. Review meetings with the bank should not commence with the statement, ‘well we missed this quarters targets…’


Be clear on what support you require from the bank
In entering negotiations with the bank it is imperative to understand the items to be negotiated. It is clear that the business needs funding support from the bank, but the level of support as well as the multitude of terms and conditions that attach to bank facilities are all items that are to be negotiated.

While a business under stress may feel that its negotiating position is weak, it should not lose sight of the fact that its ability to generate cash (however limited) may very well represent the bank’s best option in recovering as much of its loan facilities as possible. There is a negotiation to take place and as always in a negotiation both sides have items to trade.

Before entering negotiations extensive consideration should be given to listing the items that are to be negotiated and ranking them in order of importance. In negotiating bank support it is crucial to be crystal clear on which items are essential to the survival of the business and which would be nice to have.

Understand the Bank’s Position
Spend some time considering the situation from the bank’s perspective. Think about the list of items that the business needs or wants to achieve from the negotiation and how each of those items would figure in importance to the bank. This process will help to identify items or objectives that are shared and those which will be hardest to agree.

Depending on the health of the business, the objectives of the bank are likely to vary significantly. For instance when a business is performing well and is seen as a good credit risk, the bank’s principal objective may be agreeing a target margin on the loan facilities. However if the same business runs into difficulty, the bank’s focus is likely to move away from the return it is earning on the loan to ensuring it recovers as much of its capital as possible.


Maintain the bank’s trust
Trust is vital in any relationship. Over the years it is likely that the management of the business has earned a high degree of trust from its bank, through operating the business professionally and keeping to agreements that have been reached. Under times of financial stress however it becomes harder and harder to adhere to financial agreements, as pressure on available cash comes from all angles.

While difficult, whatever agreements have been reached must be adhered to. The bank should be kept fully informed and must be able to have full confidence in the information they receive. No matter what the personal relationship between the business and its banker, the choice facing the bank is ultimately whether to support the existing management or take alternative action. A breach of trust makes that decision easy.

Conclusion
In times of financial stress dealing with banks is difficult. Their money is now at risk and convincing them to provide further investment is a real challenge.

Despite their reluctance to participate, the bank and the management of the business have interests that are very much aligned. Both parties want to maximise the value of the business and on this common interest is where the focus needs to lie.

The key to gaining bank support is to reach consensus with the bank on how best to maximise value and to demonstrate that the existing management are best placed to achieve it. This is not an easy task and employing specialist advice in approaching the bank, can help to secure financial support.