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 small business owner and you’ve had a great relationship with your bank. In fact, your relationship manager is a member at 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 worse yet, 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 your 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 blister 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 all of these things. Fear can be an effective tool for a lender when a business owner doesn’t know any better or have 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 over the years with your relationship manager.

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.

Another thing is to have a plan. That plan may involve some business initiatives—sourcing product 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 Consulting Firm

You should also know that there are specialized financial advisory consulting firms that 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.

There are specialized investment banking firms that work with companies from a balance sheet 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 out there, 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 exactly advertising on billboards. Many firms have the expertise to position a company in the most favorable light to the right cross-section of lenders from whom we are regularly sourcing loans, but you need to do your research to find the right firm.

At the end of the day, a misstep in your business is not necessarily the end of the world. If you’re proactive, 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 relationship manager at the bank.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Concepts Applicable to All Borrowers & Lenders and What Kind of Loan? This is an updated version of an article originally published on April 12, 2019.]

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