Managing Your Relationship With Your Business Lender in Times of Crisis

What To Do When You’re Not Sure You Can Pay Your Commercial Lender

You are a middle-market business owner with a great relationship with your bank. Your relationship manager is a member of your country club. Business has been booming with few to no issues. But one day, you get to your office and learn that one of your largest customers has canceled an order. Or, the price of one of your material inputs just significantly increased. Suddenly, cash flow is dwindling. You predict you may breach a covenant with your commercial lender or miss a payment. You start delaying payments to some vendors to manage your company’s cash flow. And then, your relationship manager calls. How do you maintain a good relationship with your business lender?

Be Honest With Your Business Lender

The first, and maybe most important, thing to do is be proactive and honest with your lender. The fact is, they are still more likely to want to work with you. Despite any bluster from your commercial lender, most banks do not want to foreclose, liquidate, or exercise any of their other remedies. However, that may not stop your lender from threatening to do these things. Fear can be an effective tool for a lender when a business owner doesn’t know better or has the right advisors. If a lender is left to their own devices, they’ll probably take an aggressive stance with their borrower, regardless of any dinners you may have shared with your relationship manager over the years.

Consult With Appropriate Counsel

Any business owner in this situation should consult with appropriate counsel. This means working with a lawyer that specializes in corporate finance and insolvency, because general outside counsel may not have experience in these situations. Simply knowing that you have someone in your corner is a good thing and having a specialist will be critical.

Another thing is to have a plan. That plan may involve some business initiatives — sourcing products from another supplier, resizing the workforce, and adjusting prices — but presenting a path forward to your lender helps assure them that the situation is not going to get any worse and the covenant (or payment) default may be an isolated incident rather than a harbinger of doom. It also goes back to my first point about being proactive.

Use a Specialized Financial Advisory and Investment Banking Firm

You should also know that specialized financial advisory consulting firms assist borrowers with planning, cash management, and business transformation. Typically, this is not a core competency for the management team, and engaging an independent firm assures your business lender.

Specialized investment banking firms also work with companies experiencing stress like this from a balance sheet transaction perspective. Depending on the situation, there may be a need to raise additional outside capital, either in the form of junior capital (to reduce your existing lender’s exposure) or refinance with another lender. There are many different types of lenders, including bank, non-bank, and credit funds, with varying degrees of risk tolerance (and interest rates).

Ultimately, the solution for your company may be to refinance with another lender while you work through any business issues. Note, though, that these lenders are not precisely advertising on billboards. Many specialized investment banking firms have the expertise to position a company in the most favorable light to the right cross-section of lenders from whom we regularly source loans. Still, you need to do your research to find the right firm.  Ultimately, your current lender may prefer you find another capital partner, and there are many credit providers in the market actively looking for deals that provide an attractive solution, notwithstanding any challenges the business is facing.

There may also be creative balance sheet restructuring and forbearance/amendment solutions, but you will typically need the assistance of that specialized investment banker to help craft, negotiate and complete those solutions.

A misstep in your business is not necessarily the end of the world. If you’re proactive and transparent and work with the right group of specialized advisors, you and your lender will often work cooperatively to craft a solution. Then, you can go back to catching a baseball game with your current relationship manager and, potentially, the point person at your new capital partner.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. What Kind of Loan?
2. Negotiating an M&A Deal
3. What’s it Worth? Valuing a Business for Sale

This is an updated version of an article originally published on April 12, 2019 and updated on August 10, 2021.] 

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