When a Bank Hangs In with a Marginal Client, It May End Up Hanging Itself
Generally, when companies struggle with declining sales or increased losses, unless management clearly solves the underlying issue(s) and the business has turned the corner, problems will continue to mount. Vendors will get further stretched which will make products harder to get and sales will slow. It becomes a downward spiral.
There are many issues to confront to successfully get a company to turn around. Unless there’s a clear plan and the resources to effectuate that plan quickly, the company is probably going to slide further.
If the client is marginal today, a new lender could probably easily be found. The problem banks have in waiting to exit a client is that if the bank waits six months and things deteriorate, it will be harder or maybe even impossible to find another lender willing to take the bank out.
If the ultimate goal is to get the client out, it’s to the bank’s benefit to pursue the exit early on. Banks that hang in need to realize what could happen by waiting and need to really get into how the company plans to turn things around. While management will paint a rosy picture and show projections of increased sales, the bank has to look at those projections and ask, “Are those real orders?” and “Do you have the cash to get them out the door?” If the orders are real but the company doesn’t have the cash to carry them out, will the bank be willing to provide that cash? The bank needs to do a hard assessment recognizing that chances of getting out in full later on will probably, or will be, less likely than if it pulled the plug today.
When the bank does decide to exit a client, it needs a plan. It needs to look at how the financing is structured and decide who will be most able to pay the bank off. That’s to whom the deal should be referred. If the deal isn’t bankable with you, it won’t be with other banks either so don’t waste your time. Start by looking to alternative lenders. If the deal is a traditional bank C&I loan, the bank should look at the assets of the client and send the client to a lender that will lend against them which is probably an asset based lender. And it’s in the bank’s best interest to look to an asset based lender known for making quick decisions and taking clients out quickly.
When the deal is closer to marginal than further deteriorated, it’s also in the company’s best interest to exit the bank earlier as an alternative lender will help the company get the working capital needed to complete its turnaround plan. When the bank hangs in with the client, it usually won’t provide the necessary cash infusion and both parties suffer.
A client that asks the bank for more time is really missing the point and putting the business at a disadvantage. They’re missing out on having access to cash needed in the long run to, in effect, save the business. Procrastination by both the bank and the client is really in neither’s best interest.
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.