You are a small business owner and you’ve had a great relationship with your lender. In fact, your relationship manager is a member at your country club. Everything has been great for years, business has been booming and there have been few or no issues. However, one day, you get to your office and you learn that one of your largest customers has canceled an order. Or, the price of one of your material inputs has just significantly increased. Suddenly, the cash flow from the business is not going to be what it has been, and you realize that you may breach a covenant with your lender, or worse yet, miss a payment. You start delaying payments to some vendors (those guys weren’t that important anyhow) to manage your company’s cash flow. And, then your relationship manager is calling for you. What do you do?
The first, and maybe most important thing to do is be proactive and honest with your lender. The fact is that they will more likely than not want to work with you. Notwithstanding any bluster from your 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 his own devices to uncover a default, the more likely they will be to take an aggressive stance with their borrower, regardless of any glasses of wine you may have shared over the years with your relationship manager.
In addition to being proactive, any business owner that finds him or herself in this situation should consult with appropriate counsel. This may entail working with a lawyer that specializes in corporate finance and insolvency, as your general outside counsel may not have the requisite specialized experience in these situations. Simply consulting with the right counsel generally will do wonders to ease a business owner’s mind when the lender starts calling.
Not that it’s a ‘turn it over to the lawyers situation’ yet, but simply knowing that you have someone in your corner is a good thing. Another thing that is helpful is to have a plan. That plan may involve some business initiatives – sourcing product from another supplier, resizing the workforce, adjusting price, etc – 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.
You should also know that there are specialized financial advisory consulting firms that assist borrowers with this kind of planning, cash management, and business transformation. Typically this is not a core competency for the management team and engaging an independent firm with expertise in this will also provide additional assurance to your lender. Finally, 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) and ultimately, the solution for your company may be to refinance with another lender while you work through any business issues. However, 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.
Ultimately, a misstep in your business is not necessarily the end of the day. 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 sipping wine or catching a baseball game with your relationship manager at the bank.
[Editor’s Note: Please check out these related webinars, which can be taken for Continuing Legal Education (CLE) credit, or simply for practical and entertaining education for business owners, Accredited Investors, and their legal and financial advisors: Webinar Series for the Startup or Small Business Owner 2019, which includes What Every Founder/Entrepreneur Should Know.]
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Michael Fixler has spent his more than 20-year career advising companies and their stakeholders in a variety of transactions related to mergers and acquisitions, capital raising and special situations, including bankruptcy cases. Advising clients from both public and private companies, institutional investors, statutory committees, and special situation buyers/investors, Mr. Fixler’s deep experience includes crafting and…
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