Tips For Commercial Bankers To Mitigate Portfolio Risk
The tech bubble in 2000/2001 and the housing bubble in 2008 started those recessions. Who would have imagined that a virus could be the catalyst for the next recession; yet here we are, on the precipice. With so many rippling effects on businesses, between the coronavirus and what’s going on in the oil industry with Saudi Arabia and Russia, it’s hard to imagine there won’t be a significant impact on economic growth.
As individuals, we’re told to mitigate the risk of contracting the virus by washing our hands and practicing social distancing. Businesses, too, are looking for ways to mitigate risk which is why we’ve started seeing many implementing work-from-home programs.
Lenders need to be diligent, too, and mitigate the risk to their portfolios. That’s why this is a good time to take a look at your client base to understand who is impacted now, or most likely to be impacted in the future, by current events. Tightening credit to marginal clients, planning exit strategies and implementing exit strategies will mitigate risk.
Under “normal” circumstances, bankers routinely look at the financial health of each client’s company to ensure that they still have a bankable deal. When they start to question that status, a monitoring process begins. It’s at that time, that they should also be looking at how they can exit the deal if it comes to that. And that includes looking at the collateral to see how it’s performing and if it can generate enough to pay off the loan. These steps apply under current circumstances, as well.
It’s important that bankers also look at the borrowing base structure and the business’ dependence on inventory in the borrowing base. Banks tend to lend more heavily on inventory than do alternative lenders. If inventory is more than half of the accounts receivable, that will make it more difficult to exit the deal. So when the structure is heavier on inventory, bankers need to start tightening that up to get the deal more in line with what alternative lenders would do; or, look for other collateral to counteract the imbalance.
At the first sign of trouble, bankers would be well-served to start looking for an exit strategy and identify their options. If an asset based lender is an option, pick up the phone and call one to see what they could do to take out the client.
Ideally, bankers can work with slipping businesses to turn things around and keep the deal. But especially in these uncertain times, those who have prepared for a client’s exit and start exiting clients before circumstances prevent it will have an easier time.
About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.
As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.