Dealing with your bank’s recovery department

Bank concerns

Just like when you apply for a loan, the bank will make two initial assessments of its exposure to your business:

1. Firstly, it will want to know how you propose to repay the amounts that you owe to the bank. This needs to be based on the forecast cash flow of your business.
2. Secondly, it will want to understand whether the value and liquidity of its security is sufficient to cover its exposure. This will be based on fresh valuations of assets that are used to secure the bank’s facilities and the business’ balance sheet.

One of the main difficulties that arises in this situation is that the borrower usually has difficulty providing this information to the bank in sufficient detail and without being too optimistic on the business’ future. What follows is an aggravation of stress on both sides that puts the business at an even higher risk of failing.

What needs to be communicated to the bank?

Drip feeding bad news to the bank will destroy your credibility. If your forecasts indicate that you need flexibility or additional funding then you need to be up front with your bank and be able to:

1. Quantify the range of financial impacts of the problems and reforecast the short term profit and cash flow;
2. Consider the banking covenants that are in your loan facilities and whether you will be able to comply with these;
3. Allow for a margin of error in the forecasts (things never turn out as you expect);
4. Make sure your financial model is working as you think it is. Now is not the time for mistakes.

If you don’t have a three way financial model (profit and loss, cash flow and balance sheet) that is capable of producing this information, then you need help. Don’t delay engaging a professional accountant to prepare this for you as if the bank doesn’t get comfort quickly, it is likely to engage its own professional to prepare the information (and you’ll pay their bill). In most situations, this will be a qualified insolvency practitioner.

Key messages to communicate

While there may be many issues to address with the bank, there are some simple messages that must be conveyed:

1. Describe the problem, its cause and its potential impact on results;
2. Explain the action taken to address the problem and avoid a reoccurrence;
3. Confirm whether the business has sufficient cash available to continue operations and service debt. If you don’t have enough cash to get through, then you have a much bigger problem.

Asking the bank for more money

When your business is tracking well, you’ll likely find that obtaining debt is easy. Don’t compare this with trying to get additional funding when your business is in any form of difficulty.

If you need to ask your bank for funding in difficult circumstances, then there are some key things to consider:

1. Banks don’t like funding tax problems. If you have accumulated tax debt, your bank is unlikely to be willing to lend you funds to pay it;
2. If there is a good reason for the bank to provide emergency funding, you will need to demonstrate that you have done everything you can to fund the problem from elsewhere and that the amount you’re requesting is just enough to get by. Don’t ask for more than you need.
3. Banks don’t like to provide funding to pay unsecured creditors. When businesses trade with each other they take credit risk just like the bank does when it loaned funds to your business. The difference is that the bank usually takes security so that it gets paid ahead of other creditors if things get messy. Asking your bank to fund you to pay your unsecured creditors is reversing this equation.
4. You will need to understand the bank’s existing security position so that you can structure your request in a way that maximises the bank’s ability to be repaid;
5. You’ll also need to have a realistic plan to repay the additional funding as well as the existing facilities.

Our message

Business owners need to be careful if their business is in difficulty. If you are having any difficulty dealing with your bank you should quickly get the right professional advice to help you.  If you are having serious difficulty with your bank, you can contact the Financial Ombudsman Service for help but you should also consider getting the right commercial advice as well.

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