In Ian McIlwraith“s story about Clive Peeters today in the SMH, he observed that Clive Peeters had been forced to make $2m of principal reductions by its bank at a time when the business could least afford to do so.  Whilst we are not in a position to comment on whether this is true or not, this is a common predicament faced by businesses that are struggling and all too often it is the fatal blow.  However manage your bank better, and this need not occur.

In the current environment banks are jumpy.  If alarm bells start to ring about a business and its financial strength, the natural reaction for the bank is to start applying pressure to recover its debt.  Bank credit departments become one eyed focused on doing whatever is possible to get their money out.  The challenge for business management is to hose down the bank’s concerns quickly, so that business capital can be applied to improving the business performance.  However once the bank is panicking, they immediately hold all the cards and managing this process becomes extremely difficult if you haven’t done so before.

3 reasons that banks get nervous are:

1. They can see a security shortfall and likelihood of losing money
2. They lose faith in management’s ability to trade their way out of the difficulty
3. They have no visibility to the business’ ability to pay its bills going forward

Below are 3 things that management should consider doing as soon as they suspect the bank is getting nervous about the viability of the business:

1) Build a plan for success – This plan needs to start and finish with a budget, including a cash flow forecast.  The assumptions that go into the forecast need to be extremely conservative with very little probability of not being achieved.  The plan needs to show when the business will get on top of its trading issues, and more importantly for the bank, when the business can afford to reduce its exposure to the bank (or at least the exposure that exceeds the value of the security held).

Banks are not in the business of winding up companies, they are in the business of making returns on the money lent so even in this environment they will support skilled managers to trade out of bad situations as this will be a better outcome than taking a loss.

2) Report to the bank weekly – the biggest danger is letting your bank imagine what is happening within your business.  The more you can tell them what is going on, the more comfortable they will be knowing that there are no surprises.  Reports do not need to be long, but they need to show that trading is performing to plan, and if not, then it is detailing what has not gone to plan and how the plan is changing to compensate for this.

3) Get a banker on your team – There are many businesses like Pearl Financial Services that have bankers that can assist you to communicate with the bank.  Having a banker on the team who can help you pre-empt bank reaction and understand the reporting needs is invaluable.  Your bank will take comfort that you are seeking expert advise to protect their interests and this will likely buy you time to get your house back in order.

One can only hypothesise, but perhaps if Clive Peeters had sought the assistance of an ex-banker early in their predicament then their fate may have been different….