Work with your bank. They don’t want you to fail

There’s a common misconception that companies facing troubles should avoid talking to their bank. The fear is that the sign of trouble could see the bank tightening the terms of a loan, or pulling the money altogether. Michael Finland, CEO of Vantage Performance says things have changed. He explains to Phil Dobbie how your bank’s relationship manager has every reason to help you resolve your problems. There’s a lot at stake, for both of you.

Working With Your Bank Transcription

Phil Dobbie: Welcome again to the Vantage Performance Podcast. I’m Phil Dobbie, and Michael Fingland is with me too. Now if your business is struggling and you don’t have the cash flow to survive, perhaps there’s some reticence to approach your bank. Maybe they know you’re in trouble. They’ll pull your loan and make your situation worse. Well Michael Fingland from Vantage Performance says, “That isn’t the case. Because if you fail, well, they lose out too, of course”. It is a common fear though, isn’t it Michael? I mean this belief that there’s gonna be some sort of adverse reaction from your bank if you go to them and telling them you haven’t got enough money to make ends meet.

Michael Fingland: There is a widely held belief amongst many in the business community that if your business gets into strife, and whether it be a listed company or a small one. That the last person you want to talk to is your financier because they might just react negatively and pull the pin. And you know, it hastens your demise. And a lot of that comes from previous recessions and as you know, we haven’t had one for about 27 years. But memories do go back and there has been significant changes in the way financiers manage problem loans. And it’s probably worth just taking a minute to try to just describe how the management of the defaulting loan is handled within the banks.

Typically, as you know, once the file is at branch land. It’s being managed by the relationship manager. Once you start defaulting or there’s a threat of default on the loan, then it’s typically moved and the ownership of that file moves from the front end of the bank to what’s called the work out division. And they’re tasked with working out whether this business can be restructured and then the loan goes back to the front end of the bank, or whether it goes down the other chute which is receivership or forcing a client to be refinanced. But there’s been a dramatic change over the last five to ten years, particularly last five years in Australia as well as around the world in how banks deal with problem loans.

Q. How does it get to the stage where that work out division or whoever it is whose dealing with the problem? What sets the alarm bells ringing? Is it them? Do they say, “Okay, you’ve defaulted now and therefore we’re gonna take this action or is it you’re approaching them? I would have thought it’s better if you approach them rather than waiting for them to…

A: Always better and this is the key thrust of today’s topic. It’s always better to be proactive but every loan will have certain covenants. Some have quite a number covenants in their loan agreements. Some are very covenant light. But generally speaking, it’s a breach of one of those covenants that sort of tips off the bank that certain business conditions are not favorable. And you might be defaulting or about to default. There might be an imminent default. So they use those covenants and you know, depending on where you are in your business cycle you’ll either have monthly, quarterly, six monthly or annual reporting to the bank where you had to provide these covenants. So they use that reporting regime and test your covenants to see if you’re breaching and whether that file needs to be handled in a different way. As was alluded to before the approach finances take now is totally different. And a lot more supportive and corrective than they ever have been. And that’s why we’ve seen that a huge growth in the turnaround industry because banks are favoring work outs more and more. And insolvency truly is the last resort. And, but it takes time for that change in behaviour to filter through to you know, SME land and directors out there in commerce to understand how banks change. And that’s why you know topics like this are good to get the message out there that you know, waiting until the bank taps you on the shoulder. You’re already behind the eight ball.

Q. Based on the danger that the bank is gonna say, “Well, look…” You know if you haven’t breached any covenants and they’re just gonna say, “Look, you know it looks fine to us right now. Come back to us when you got real problems.”
A. No. They will certainly start working with you. So you wanna keep in mind, and it’s probably worth just recapping one of the topics we talked about previously. Which is the real reasons why businesses fail and not to go through the points, but just more to pick up one of them particularly. So not acting early enough, as we talked about what the biggest issue is to why businesses fail, so this is a central thing that we talk about today, so not acting early enough. Not being prepared to make the big changes that are required, insufficient management training, a sudden impact event, lost a major customer or industry downturn or whatever, and not collaborating with your financiers. Number five, that’s the really big one. Here, so when a company or an industry and the banks all tend to look at you know, they rewrite industries as well not just your companies. If you are in an industry that has had a lot of distress. They will start putting a lot more focus on every company in that industry. Whether you’re going well or not. So you need to be aware of that but not collaborating with finances is one of the big triggers for reasons why businesses fail.

Q. But if you say you’re not approaching the work out banker or you’re approaching your relationship manager within the bank, so how do they work?

A. If you’re a relationship manager you might have had it based on two things and remunerated by two main things. One is the size of your portfolio. “How many clients have you got in your bag and what’s the collective size of all the loans in there?” So you’ll wanna do everything you can to hang onto that file and not let it drop into the workout team. Because as soon as that happens, it drops out of your remit and your bonus structure starts to be impacted.

Q: So I guess that answers my earlier question that they are gonna listen to you because these dangers know that if they don’t, then down the track. He’s gonna be picked up by a workout banker and they’ll lose the commissions. So they want to work with you straight away.

A. They will do everything they can to hang on to you. And in the last few years, particularly in Australia, it’s become even more acute because of Basel two and three, and all of the changes that the banks have had to make around the world. They are very acutely aware of the cost of capital. And once that file goes from being managed in the branch to dropping to the workout team. Not only does that bank manager lose that out of their bonus pool. They also give the banks internal cost per capital goes up. So what it does, the more files that drop into work out it increases the bank’s overall cost of capital which means it costs more to borrow money from offshore. So they’re making less money. So over the last few years, the banks have become a lot more acutely aware of that issue because of the Basel two and three requirements. But the…brand damage and the PR impact and the business lending has been fairly anemic in Australia for the past few years. And personal lending for homes has been very strong. But business lending has been fairly anemic. So the branches are doing everything they can to hang onto those files, whereas five or ten years ago, a lot more of those files would dropped into the workout teams.

Q. So the situation has changed. Your local branch or your relationship manager is gonna be keener than ever than now. Keen as mustard to talk to you. But what, I mean they’re still gonna look and say, “Hey. You got yourself into this situation.” Are they gonna trust you as actually being a good business person?

A: Yes. So you know, perhaps we’ll talk through what motivates a banker. Because trust is always the missing element , it’s not always, but it can be a missing element. So how do you infuse that trust? How do you rebuild that trust? And often what’s required because you are often dealing in a time sensitive situation. You need to bring in someone who already has the trust of the banks. And that’s where your turnaround practitioner, chief restructuring officer comes in in your favour. If you’re bring somebody in who has a very strong relationship with banks. Then the business gets a de-facto, “shot in the arm, ” if you like from that turnaround practitioner because the banks know and trust them. And typically, a lot of the leads come from financiers so they know that you know you’ll gonna put up a very robust plan. If you’re gonna pledge that this plan is sound and workable. The bank already trusts that advisor if that’s the case. So you need to work out how to replace or create that trust and often a management team doesn’t have time to rebuild the trust that’s required. So you need that infusion from someone that they do trust.

Q. Right. And I guess as well as trust, you’ve also got to share that you’re sharing the hurt a little bit here.

A. When you know, when a management team goes to the bank, it says, “We need more money or whatever,” in a simplistic way. The banker always wants to see that there’s some shared sacrifice. What are the directors doing to assist rather than saying, “Can we have more money?” Are you making those calls that we talked about before? Are you making these big changes? What are the directors prepared to do? Are you prepared to put some money in as well? Are they prepared to take a pay cut? You know, you need to demonstrate some shared sacrifice and that goes a long, long way. And a lot of directors don’t understand that. That having a workout advisor working with you, I will always say, “The odds of the bank approving every structure thing goes up dramatically.” If we can demonstrate that we’re prepared to take some of the pain as well.

Q. I’m assuming that you should approach the bank if you think things have gone off the rails. You should approach the bank after you’ve engaged with the specialist turnaround advisor. Because you’re basically saying, “Hey look, we know there’s a problem. We may not have a total plan about how we’re gonna fix it but we’ve already taken the first important step.”

A. Yeah. Quite often. But sometimes it simply if you’ve got a, and this is why you gotta build a good relationship with a banker but even just a go to them say, “Hey look. We’ve got some issues. You know, can you recommend who we might talk to?” So it can happen either way . You know engaging with an advisor if you’ve already reached out through your contacts and found someone. Or the bank might suggest a few names for you to talk to. And that’s a great way to start the relationship because then they know you’re being open and transparent. And that’s the biggest issue that bankers have is you don’t ever want to get in a situation where they think you’re hiding things from them and perception becomes reality. And once you got that right, it’s very difficult to rebuild trust with a banker if they already have a perception that you’re hiding things from them.

Q. Which they’re not gonna like because obviously they’ve got their own reputation which is on the line if things go bad with you. Plus of course, as you mentioned this big factor which is the thing that’s changed most. The change to the structure of the internal cost of capital, which can skyrocket if it moves to a workout banking team.
A. Yeah, we have seen the huge increase in the cost of capital banks have to borrow a lot more money from the equity markets that have the liquidity buffers to deal with the number of files that go into work out. So they are working more and more to make sure your business survives. And that’s the mentality that we’ve got to get out there to you know, business land that things have changed dramatically in the last five to ten years. You know the banker is no longer perceived to be the enemy. They are very much your ally and they want your business to survive as much as you do.

Q. So I guess that the thing is to keep in touch with your banks, so that they don’t feel like you are just getting in touch with them when things are bad. And keeping them up to date seems to be a key part of it all, doesn’t it?

A. Absolutely. Keep working on that. Even when you don’t need them. Because you never know when you will and that’s a great point.

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