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Glenn Bradley gives timely advice for businesses looking to gain bank support in times of financial stress.

According to Robert Frost, "A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain." His reflection on the behaviour of banks is as true today as it ever was and as Irish business people will tell you, the rain has been falling, and falling hard. As the economy continues to stutter, sales are hard to come by, cash remains elusive and credit terms are being stretched to the limit. Banks that were eager to increase credit lines during times of plenty have cut back funding making rough economic waters even harder to navigate.

The prospect of approaching the bank for support can be daunting. The power in the borrower-banker relationship has shifted dramatically and businesses often feel they are at the mercy of their bankers. The power in the relationship is not completely one-sided. The survival of the business is crucial to the bank in recovering its loan and banks need to work with their customers in order to regain profitability.

So, how does a business persuade their bank to at least share the umbrella?

Trust is vital in any relationship. The management of the business has worked hard at earning trust from its bank, through operating the business professionally and keeping to agreements. Under financial stress however, it becomes harder to adhere to financial agreements, as pressure on available cash comes from all angles.

As banks deal with their own problems, there have been huge changes in senior personnel that manage client relationships. Dealing with a new account manager, who has little knowledge of the long history between the business and the bank, makes maintaining trust an even more difficult task. While difficult, whatever agreements have been reached must be adhered to. The bank should be kept fully informed and should have full confidence in the information they receive. No matter what the personal relationship between the business and its banker, the choice facing the bank is ultimately whether to support the existing management or take alternative action.

Banks hate surprises. If the business is experiencing difficulties, make sure that the bank is informed early of the situation and kept abreast of plans to deal with it. If those plans include having to default on capital or interest payments to the bank, avoid taking this action without first seeking their agreement. Debts may have to be restructured and a specialist advisor can help in negotiating revised terms.

All businesses should operate to a plan. When survival of the business is dependent upon the support of its bankers, getting this plan right takes on an even greater degree of importance. The business plan presented  is all the bank has to go on in deciding whether to support the existing management in recovering its exposure. Getting it right is all important and specialist advice should be employed.

Points to remember in preparing the plan:

• It must be fit for purpose - if income has shrunk, costs must do likewise. This is the opportunity to show that the existing management team represents the best alternative in maximising the value of the business.
• It must be realistic - this is not an exercise of fantasy to demonstrate how the bank debt will be repaid. Be confident that no one else will generate more out of the business than the existing management.
• It must be measurable and achievable - banks like nothing better than tracking performance. The plan should be conservative. Review meetings with the bank shouldn't commence with the statement; ‘we missed this quarters targets...'

Before entering negotiations with the bank it is imperative to have identified the items to be negotiated. It is clear that the business needs funding support from the bank, but the level of support as well as the multitude of terms and conditions that attach to bank facilities are all items that need to be negotiated.

While a business under stress may feel that its negotiating position is weak, it should not lose sight of the fact that its ability to generate cash (however limited) may very well represent the bank's best option in recovering as much of its loan facilities as possible. There is a negotiation to take place and as always in a negotiation both sides have items to trade.

Before entering negotiations extensive consideration should be given to listing the items that are to be negotiated and ranking them in order of importance. In negotiating support it is crucial to be clear on which items are essential to the survival of the business and which would be nice to have.

Spend some time considering the situation from the bank's perspective. Think about the list of items that the business needs or wants to achieve from the negotiation and how each of those items would figure in importance to the bank. This process will help to identify items or objectives that are shared and those which will be hardest to agree.

The recession has hit the banking sector as hard as any other and negotiating with the bank today is a very different undertaking than it was at the height of the boom. Suffering from continuing heavy losses, the banks' focus has shifted toward regaining profitability, which to business customers means an increased cost to borrowing. The tight margins that were available when the economy was booming are just not available today. In addition, banks' recent experience of having to write-off billions of euro in un-recoverable loans, has increased their resolve to obtain improved security for their loan exposures, to ensure that security is water-tight and to maintain tight control over the cashflows of the business.

Depending on the health of the business, the bank's objectives are likely to vary significantly. When a business is performing well and is seen as a good credit risk, the bank's principal objective may be agreeing a target margin on the loan facilities. However, if the same business runs into difficulty, the bank's focus is likely to move away from the return it is earning on the loan to ensuring it recovers as much of its capital as possible.

In times of financial stress dealing with banks is difficult. The key to gaining bank support is to reach consensus with the bank on how best to maximise value and to demonstrate that the existing management are best placed to achieve it. Reaching consensus is not easy and specialist professional advice in preparing a business plan and negotiating with the bank can help to unlock a deadlocked business.

Glenn Bradley is a director at kavanagh fennell ADVISORY. For more information log on to www.kavanaghfennell.ie

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