All small and mid-sized enterprises, and even large corporations as well, face financial troubles at times. Different companies handle this in different ways.
In my experience as a banker, the ones who deal with such issues in a transparent and proactive manner vis-à-vis their bankers, are in a minority, with most tending to duck the issue, prolong it or, worse still, pretend there is no problem.
Owners do not seem to realise that a) banks are sizeable stakeholders in the business b) they only get paid interest and fees and not a percentage of profits c) they do not “love” the SME’s business and d) they are in the business of financing business. Their primary interest is in protecting their loans.
It is important to realise banks have to be properly managed and that bad handling can result in panic and the collapse of the firm as a result of a withdrawal of credit facilities. The key to handling such a situation lies in timely action and transparency. I refer of course to banks that have extended working capital or other facilities based on the balance sheet of the firm.
If the company has taken “business loans”, there is very little scope for any relief. Business loans are products based purely on cashflows and evaluated essentially vide bank statements. Business loan customers do not have relationship managers, no one to talk to and no room for manoeuvre as the product does not lend itself to any variation.
SMEs tend mostly to pretend to their bankers that there is no problem. When cashflows dry up or there are losses, leading to possible delays in repayments, SMEs either a) borrow from the “market” to meet obligations (expensive, temporary and a bad idea) or, b) delay bank payments citing fictitious reasons for delays.
Neither is a viable option for more than a very short while. Here is what happens when companies delay payments.
First, “past due” payments appear on various reports and if persistent come under the radar of seniors. If these build up or are regular, credit facility could be restricted or frozen. Explanations will have to be given to the credit risk management department.
Second, if past dues go over 90 days, banks could well downgrade the account to “OLEM” (Other Loans Especially Mentioned), which is reflected in the report to the UAE Central Bank. Which means every other bank will see it. At this stage, other banks may start freezing facilities and certainly no new lender will look at the company.
Third, if past dues go beyond 180 days, technically, the account would have to be considered “substandard” or doubtful. At this stage, there is serious panic at banks, which will demand money back, or additional collateral and call the customer in for restructuring discussions.
So far, we have the blamed the SME for everything. However, it is important for owners to know how banks can equally contribute to making the problem worse. They can therefore take preventive action.
A good relationship manager (RM) will smell a problem before it blows up. This is rare. Even when a problem surfaces, the RM will try to keep it under wraps for as long as possible, as the implications of having a “problem” account on his hands are many.
Therefore, the time between the first signs of a problem and its downward spiral to an OLEM classification is hugely critical. This period is characterised often by procrastination at the bank, and a refusal to admit the existence of a serious problem at the company.
A second problem is that RMs more often than not do not have the technical skills for a restructuring or even a mature understanding of a company’s problems. It needs to be understood that the primary responsibility of a RM is revenue generation. Protection of the banks’ assets is equally important requiring a solid understanding of risk management, which few RMs are well trained in.
The net result — postponement of the admittance of a problem for selfish reasons, which ultimately will blow up in the face of the customer.
What is to be done?
The combination of the SME Owner/CFO and the RM not addressing the problem in a timely manner is a lethal one. The responsibility lies squarely with the company that needs to do the following well in time.
First, inform the bank, face-to-face, of the impending problem well before it explodes. Document the meeting.
Second, explain in writing the cause of the problem and what you are doing to fix it and give a time frame for the same. There has to be a tangible plan.
Third, ask for extensions of repayments falling due. This request has to go in well before due dates arrive — remember the RM will need to study it, be convinced, get his superiors’ support and write up a note for approval.
The bank may expect you to inject additional collateral and/or equity, so consider this as well.
Clichéd as it may sound, honesty is the best policy. Banks truly appreciate openness and a proactive approach, especially to financial difficulties. This will not be forgotten and will go a long way in securing the bank’s long-term support for the company.
The writer is the Managing Director of Vianta, which works with SMEs in raising bank finance.