It all came down to a basic misunderstanding. The borrower thought that banks financed growth. The bank thought the borrower was “over-levered.” And so it began. For most middle-market borrowers the bank is their biggest financial partner, having often invested more actual cash in the business than the owner. But how well do banks and borrowers really understand each other? Will they successfully work together to get through a rough patch? Can the borrower already be operating out of the bank’s comfort zone and not even know it? We frequently get involved with borrowers when the lines of communication are simply broken, resulting in animosity and mistrust. It may not be anyone’s fault; it’s just that a bad situation has become worse. The bank expected the borrower would take ownership and fix its problems, but in many cases, even with best efforts those problems haven’t been fixed. Time runs out and emotions run high. Why does it take a third party mediator to bring rational business people together for the common good?
Borrowers are from Mars, Bankers are from Venus
In a recent presentation to the impassioned board of directors of a successful food processor, we showed how leverage had spiked in the past year. The board expressed disbelief at our figures, which came directly from the company’s audited financial statements. At one point we were told emphatically “well, the numbers must be wrong!” OK, but what is really being said here? From the company’s view its top line is growing quickly, it has been consistently profitable and it has a great management team. Why isn’t the bank pleased with the progress and relationship? From the bank’s view, the company verges on being out of control. It has borrowed on its line of credit to buy fixed assets, and existing real estate loans are now under water. It has become increasingly reliant on the line of credit to finance growth. Added to this are numerous rush requests for over-advances and “emergency” loans. The bank is worn out and worried.
What can be done?
In our consulting practice, we frequently see these perilous communication gaps between borrowers and their banks. Here are some lessons we’ve learned:
- It is not easy to change your partner.
- The situation is often worse than is obvious.
- Banks are financial partners but they answer to a higher authority (the Federal Regulators).
- No one should assume – just because they are not talking – that everything is OK.
- Borrowers may mistakenly assume that the bank is there to meet all their needs.
- Borrowers mistakenly assume that since the bank has “made money off the relationship in the past” that this will somehow mean they will take on additional risks now.
- Borrowers’ panacea -”With a new bank everything will be OK.”
- Borrowers: be proactive with bad news.
- Borrowers: do a forecast and share it with the bank.
- Bankers: set expectations, assure adequate and consistent reporting and explain financial covenants.
- Bankers: meet periodically with the CEO (versus just the CFO).
The meaning behind the words
We have come up with the following translation tool for finding the hidden meaning in each other’s message:
WHAT BANKS SAY
What the Banks Say We are here for you.
What it Means So long as there are no material changes in borrower’s or bank’s financial condition.
What the Banks Say We finance Growth.
What it Means Earnings finance growth; banks provide short term cash for short term needs and finance long term assets with long term debt.
What the Banks Say We value your business relationship.
What it Means So long as it meets our risk and return requirements.
What the Banks Say We want to lend money.
What it Means Except that Credit Administration is already breathing down our necks because we have made too many loans in your industry.
What the Banks Say We understand your needs.
What it Means We understand our needs and hop you fit.
WHAT BORROWERS SAY
What the Borrowers Say I need to borrow more money.
What it Means I am short of cash and don’t know why.
What the Borrowers Say I run a lot of cash through your bank.
What it Means I wish I kept more of it.
What the Borrowers Say I’ll pay you back, you know I’m good for it.
What it Means My wife will never let me pledge our house.
What the Borrowers Say I don’t need receivables financing, I need payable financing.
What it Means I am getting jammed between customers and vendors.
How does an independent third party break through communication log jams?
Why ask an independent mediator to get involved? Can’t we just do it ourselves? You’d be surprised at how many times Burke Capital has quickly brokered a peace by just taking a fresh look at the situation. We translate for both sides and develop mutually acceptable solutions which get the bank and borrower what they both want and need. It sometimes just takes a third party with a comprehensive knowledge of both sets of business needs to reach an agreement that works for both the borrower and lender. Resolution to the Case Study: We are happy to report that for the food company, we helped them re-prioritize capital investment activities toward the highest return initiatives. They recently launched an exciting new product with a significantly higher margin that is rapidly gaining traction. They are on track for a record year of profitability. If you’d like to hear more, or would like to discuss your unique need, please contact us. Contact us to unleash the power of Burke Capital and its Integrated Expert Network (IEN™) for your organization.