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    How to Survive Your Bank Debt

    8 min read time

    Cash is always king, but this is especially true in times of crisis. Liquidity for your company is critically important, and banks provide a path to liquidity. You must ensure your relationship with your banker is strong so you can survive your bank debt in this pandemic.

    How to Survive Your Bank Debt

    More than likely, you have been working with your bank on some level, and now you may need them more than ever. The following will address three important areas to keep in mind when working with your bank.

    • Bank Relationship
    • Reporting & Analysis
    • Implementation

    Bank Relationship

    Relationships are key to many aspects of a business – employees, clients, vendors, and of course, banks. All relationships are built on open communication, transparency, and making your needs known. By working on all these areas, you will gain the trust and confidence of your banker, which will ultimately work in your favor as you navigate your banking needs. Banks are your partners and should be viewed that way.

    Communication

    Communicating with your banker is of the utmost importance in times of crisis. Do not hesitate to be on the offense and contact them first. Make it a priority to consistently establish a schedule to communicate with your bank even if it is merely to check in to say hello. Remember to ask how they are doing. Your banker is under stress just as you are, so showing interest in them builds a stronger relationship.

    Transparency

    Do not be afraid to show transparency. Be open and forthright. A frank conversation may curtail questions they have or allow you to be prepared for questions. Taking time to provide thoughtful and detailed answers is good practice, even if this means you need additional time to respond.

    Make Your Needs Known

    Be straightforward in your needs and requests. For example, you might request a short-term bridge loan, relief on covenants, modifications to existing credit facilities, cash management tools, or other needs you have identified. Banks will require time to address these requests, and the more touches and updates you provide will make the bank’s process more efficient and helpful to you.

    How to Survive Your Bank Debt

    [Watch this 30 minute video to hear Michael Poole and Eric Zaleski discuss how to work with you banker.]

    Reporting & Analysis

    Assessing your financials and internal processes more frequently is an essential step for your business to withstand this crisis. Meet with your management team regularly and review all aspects of your business. These steps will help the leaders guarantee all employees are taking the right actions for the business. Utilize your employees and be open to their suggestions. They work on the day-to-day operations in all areas and may see issues differently; their knowledge could help your company be more efficient and successful. Do not be afraid to change operations or processes.

    If you’d like an outside perspective, operational assessments are available. Those assessments ask questions about your business and provide you an independent view of your business. Lean on your professionals – investment bankers, advisors, accountants, lawyers, etc.

    Using this honest assessment of your business to address and implement needed changes will help you continue to create a solid partnership with your banker. A relationship-oriented banker will appreciate your efforts and, in turn, be an advocate for you within the bank. Remember, your banker has the duty of being on the front line as an officer. They work with you, understand your needs, and will work hard to guide you to success.

    Being analytical, open to change, and proactive will get you closer to obtaining your banking needs.

    Reporting to Your Bank

    Financial analysis is sensible in all business environments, but it is needed even more to survive the pressures of bank debt in uncertain times. Providing financial statements, projections, and cash flow reports will assure that you are diligent in looking at operations and progressing toward success. Prompt and accurate reporting will be valued by your bank.

    If you have not historically had to provide monthly financial statements, it is important to start now and continue that going forward when we exit this environment. If your banker currently does not require financial statements, it’s still a good idea to have them on hand and review them with your team each month.

    Projections and cash flow are vital to your business. The projections allow you to track what you anticipate today and then compare them to actual performance. You should check your projections at least monthly. This scrutiny will enable you to pivot quickly and proactively to make necessary changes.

    Accounts receivable and accounts payable should be reviewed weekly. Any slippage in the collection of receivables will constrain your cash flow, which could have a significant impact on operations. Similarly, accounts payable should be examined to manage the outflow of your cash. Be aware of what you can and can’t do.

    Combining these financial reports and creating a package (PowerPoint presentation or other) will allow the bank to easily track your progress on a monthly basis. Include a narrative outlining the changes month to month and any changes you plan to implement. Your analysis, which shows projected versus actual results, reflects trends and is a critical report to focus on, as the bank will do the same.

    Once the reporting package is created, it will be easy to update and will be an excellent tool for internal management discussions as well. In addition, your ability to be proactive in providing the information makes the banker’s job much easier. He or she will be able to address your needs and get in front of any potential changes. Remember, the bank is required to document and report to its regulators, and this information is very useful.

    Consider the following areas in your analysis.

    Customers

    Without customers, you do not have a business. You need to understand how the crisis is impacting their business. Determine how quickly they expect to restart normal buying patterns. You should ask about their finances. Have they slowed down paying you? The answer is vital, as you depend on receipt of their cash to keep your company operating.

    Suppliers

    Think about your critical suppliers. Are they capable of staying in business? What difficulties are they facing? Understand how their other customers are doing. Consider whether alternative suppliers can take over should your suppliers not deliver. Do not hesitate to reach out to your suppliers to gain insight into their situation.

    Workforce

    Your employees are your greatest asset. Make sure to listen to their concerns. Seek suggestions on what they need. Ask your employees about the business – what do they see and hear? Bring them into planning for the return to normal operations. Work to improve communications. During a crisis, you can never communicate too much.

    Expense Control

    In a crisis, your reduction of expenses always lags your falling revenues. Move fast to review and cut expenses. Now is not the time to be timid. Focus on paying the expenses that will keep your company operating tomorrow. As mentioned above, ask your employees where the company can save money. Your employees want to help, as they depend on the company for their cash flow.

    Projected Cash Flow Report

    Your management of cash is critical during financial difficulties. A cash flow report is different from projected financial statements; the goal of the cash flow report is to understand cash in and cash out.

    Cash flow reports allow you to prioritize your vendors and how you pay them. Determine whether every supplier is vital to your most valuable customers. Depending on the outcome of your analysis, it may determine how you approach your payables.

    Ask yourself, how does your cash position measure up to the financing available from your bank? Continue to review your line of credit versus the collateral that supports it. If you don’t prepare a report such as a borrowing base certificate that tracks this information, you should start, because this is a useful report for understanding your liquidity. A goal is to have at least enough cash or available credit to cover up to one month of expenses.

    Finally, determine whether any assets that are not leveraged could help you access more capital if needed. For example, unencumbered real estate, fixed assets, cash-surrender value of life insurance, inventory, or accounts receivable.

    Analysis of customers, vendors, workforce, and expenses is essential when managing cash flow and making decisions. Don’t be hesitant to do what is needed to keep the business in a stable cash position.

    Rules for Preparing Projected Cash Flow Reports

    Develop the habit of preparing your cash flow statement regularly. Once you have a base case, you should create various scenarios. Run an upside scenario – something like 10% above your base case. Then address a downside or worst-case scenario to the tune of 20% off your base case. From there, take a conservative approach and manage the business to the downside and the base case.

    In the instance of negative cash flow, figure out when your cash reserves will run out. Then determine whether you have access to additional liquidity as discussed above. Determine whether you’re better off ceasing operations, or even able to, for a short time to preserve cash.

    If you have positive cash flow and expect it to continue, do not give in to the temptation to be content with your position. This is a great starting point, but don’t waste it; conserve! Continue to review what events may change this into a negative position and stay on top of it. You might consider making decisions as if you had a negative cash flow.

    Your cash flow statements will map out how your company will navigate the next several weeks and months of this troubled economic environment. Again, review consistently to determine what changes need to be made.

    Financial Statements

     Your balance sheet and income statement need to be timely for internal and external review. If you are not producing financial statements within 20 days of the month-end, then you are managing from behind. You need to see results quickly to make good decisions, and that will help you stay out of trouble.

    In addition to the items mentioned earlier in the expense, customer, workforce, and supplier analysis, capital expenditures (“CapEx”) should be taken into consideration. Defer all growth CapEx until entirely out of the woods, and prioritize all maintenance CapEx. Some maintenance can likely wait a longer time. For example, it may present a good appearance to refinish fixed assets every year, but this cash outflow can most likely be delayed. Additionally, you may find opportunities to buy needed assets for future operations at deep discounts. However, balance this opportunity with the need to have cash available. As always, remember to calculate your return on investment.

    Loan Covenants

    Calculate your loan covenants now and through the end of this year. Note especially the near-term measurement periods. Most likely, the loan covenants include your 2019 performance, which could skew the calculations. Banks will work with you, but you need to be proactive.

    Specifically, look at an excess cash flow recapture if you have one. Almost all recapture provisions are based on 2019 or trailing twelve-month results. Since this economic environment was not anticipated, the excess cash to cover additional principal payments is likely unavailable, as that cash is needed to keep the company operating.

    After analyzing your covenants along with your cash flows and projections, approach your bank to address your needs, and the sooner the better. One idea is to ask for deferment of principal payments. Deferment is a very likely option and would merely extend the amortization of your loan. In today’s environment, banks would be receptive for up to six months of deferment.

    Your bank will be open to working with you. Bank regulators are encouraging banks to be proactive in working with borrowers. Regulators are looking to be supportive and not restrictive. Further, they have indicated they might not downgrade loans and won’t require the banks to increase their capital reserves. This is significantly different from the last financial crisis. It means take action now to modify your bank loans. Do not wait!

    Personal Guarantee

    If you do not have a personal guarantee now, plan on the bank addressing that issue and asking for one if you ask for modifications to your loan. Be prepared to say yes in order to have your loan requests approved. How you deal with a personal guarantee depends on what you need. Parameters should be put in place, and there needs to be consideration on both sides:

    • Will the bank require a cash injection instead of a personal guarantee?
    • Will a personal guarantee be unlimited and have a reduction over a period of time?
    • Will the bank require reduction in personal compensation to offset a personal guarantee request?
    • If you have seller debt on the balance sheet, be prepared to stop all payments and conserve that cash within the company.

    Implementation

    Share the analysis of your efforts with your banker. Tell them how you are making changes in order to survive. Point to the cash flow to show how you are changing operations (e.g., expense reduction). Have a list of all the actions you are taking to keep your company operating.

     Prepare your company to be successful when the crisis ends. Make changes that you have hesitated to make (e.g., organizational structure, key management, marketing initiatives).

    You need to show your banker that your company is strong enough to survive this crisis and has a bright future.

     

    Michael Poole

     

    Michael Poole, Shareholder

    Investment Banking

    mpoole@pcecompanies.com

    Orlando Office

    407-621-2100 (main)

    407-621-2112 (direct)

    407-621-2199 (fax)

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    Michael Poole

     

    Michael Poole

    Investment Banking

    Orlando Office

    407-621-2112 (direct)

    mpoole@pcecompanies.com

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    407-621-2112 (direct)

    407-621-2199 (fax)

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