Managing The Needs of Your Senior Lender

If  you’ve been in business for awhile and you have a sizable line of credit with a major bank, say for at least $1,000,000,  you may have been going merrily along with your business without ever having any real issues with your banking facility.

Every year, your making a profit, meeting your banking covenants, and having a game of golf or two with your bank manager.  If there are a few bumps in the road, they are typically handled without much problem and you feel pretty secure in your banking relationship.

This tends to be a pretty common scenario for businesses in operation for more than ten years and generating $5.0M plus in annual sales.

Now comes a long the worst recession since WWII.

In fact, its the first real recession in 20 years.

Banks have slowed down and in many cases stopped lending all together.  Bank portfolios that are weighted in some of the harder hit sectors have taken a beating.  As a business, banks are inwardly focused and taking care of their own business.

Its at times like these that business owners can develop a false sense of security with their banking relationship and even believe they have some influence or clout with the bank based on many years of paying for bank services.

But in times of recession, all bets are off.  Every man for himself and all the rest of that jazz.

Senior lenders, almost without exception, provide business financing for working capital and equipment on a demand basis.  We don’t think much about the demand loan terminology until its actually applied.

If a banks portfolio is going in the wrong direction and your portion of the balance sheet is viewed to be higher risk, then your senior lender may decide to demand repayment of your loans …or… provide additional security to lower their risk.

Sound familiar?   In North America, banks have choked the money supply and asked governments to help them better manage their risk through guarantees or pledges of assets.

Talk about having you over a barrel.  And they do.

So when your senior lender calls you up and says they need to improve their security position or they will be forced to reduce your line of credit or call your loans on demand, what choice do you have?

You can try to move to another Senior, but in the middle of a recession it may be very difficult if impossible to accomplish.

You can move to an asset based lender, which may very well be possible to achieve, but likely at higher rates.

You can see if they are bluffing and refuse to sign off on what they’re asking for.

Or you can cave into their demands and hope they don’t call everything anyway once they are in a stronger security position.

This can be scary times for many business owners, especially if you’re offside on any of your bank covenants, in which case, there will surely be requests for additional security, reductions in facilities, higher rates of borrowing, demands for repayment, or some combination of the above.

This is part of what comes with cheap money.  Senior bank facilities are traditionally the lowest cost source of financing a business can have.  Security can be based on assets like inventory that really don’t have any security value to the bank, but are still leveraged based on the strength of the overall business and the overall economy.

When times tighten up, like they are right now, senior lenders tend to hold their cards close to their vest and can be very unpredictable.

The best way not to draw their attention in recessionary times is to keep a low profile, and above all else, make sure you understand and meet your bank covenants.

And if they start talking about changes required with your banking facility, take them very seriously and weigh the pros and cons carefully before making any decisions.