Lender Fatigue?
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“Lender Fatigue” is a term that refers to the situation in which a lender is seemingly tired of or exhausted with dealing with one of its debtors.
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It is often characterized as a “Loss of Confidence”. That is, the lender no longer has confidence in the debtor’s credibility and/or ability.
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In many cases, the lender simply wants to end the relationship with this specific debtor for any number of issues that are outside of the debtor’s control.
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However labeled or defined, it is a deterioration of the lender/debtor relationship which threatens the business’s ability to borrow capital.
What are its
manifestations?
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Lender/debtor conversations become tense.
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The lender requests more and more detailed information and clarification.
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The lender imposes a new cap on the credit line.
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The lender moves to accelerate repayment terms.
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Collateral requirements are expanded.
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Personal guarantees are required and/or expanded.
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“Asset Based Loan” terms are imposed or tightened.
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Responsibility for the account is moved to the “Asset Based Loan”, “Special Assets” or “Workout” group within the lending institution.
What are the
underlying causes?
Lender side:
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The account is unprofitable for the lender.
- Credit facilities are not fully used, even though the lender is
forced to reserve for potential borrowings.
- Cash accounts are interest bearing. Non-interest-bearing accounts are preferred
- Overhead cost assigned to the account and direct costs associated with the account are not adequately covered by revenues.
- Incremental direct costs of servicing the account are
increasing.
- Lender finds that it is spending more and more time discussing, evaluating and justifying the debtor account.
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Debtor’s credit risk has increased due to operating, competitive or market events.
Debtor side:
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Management personality clashes with lender representatives.
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The business was undercapitalized from the beginning with little room to maneuver.
- Requesting additional credit can trigger a
rejustification of the account.
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Negative operating, competitive or market events.
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Promises repeatedly not kept.
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Forecasts repeatedly not met.
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General underperformance versus history, forecasts or competitors.
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Revenues declining.
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Profit margins falling.
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Collateral depreciating.
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Poor or duplicitous communications.
- Monthly management reports not consistently
provided or are misleading.
- Year end audit reports not completed or not
provided on a timely basis.
- High concentration of critical customers.
- High concentration critical suppliers.
- Account is out of compliance with the loan covenants.
What can be
done to address the situation?
Repair the existing relationship:
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The burden of repairing a relationship falls largely with the debtor.
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Focus on improving forecasting, reporting and communications.
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Reevaluate strategic and tactical action plans; implement them; and, effectively communicate progress to lender.
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If necessary, reorganize management team.
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Possibly expand advisory team (accountants, consultants, attorneys, etc.).
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If out of compliance, develop and implement specific action plan to get into compliance.
Find replacement lender:
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As above, reevaluate strategic and tactical action plans.
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Begin immediate implementation of initial action plans.
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Develop detailed Cash Flow Proforma, and P&L and Balance Sheet Proformas.
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Draft a “Prospectus” and accompanying “Presentation Deck”.
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Look for lenders:
- Who focus on your segment of the market
(small businesses, middle market businesses, etc.).
- Who are not overly focused on / invested in
your industry.
Remember:
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Improved performance is not a guarantee of credit line stability.
- A lender may patiently wait for a business
to emerge from a down business cycle before calling a loan to
ensure that it totally recovers its outstanding loan.
- This can leave all other stake holders at
risk (employees, pension funds, trade creditors, customers,
owners).
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There are interim funding sources: factoring, asset-based loans, bridge loans, private lenders, etc.
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Interest rates are not the most important factor in evaluating a loan. Loan terms such as prepayment penalties, grace periods, notice and right to cure, and full payment triggers are all important elements.
General
recommendations:
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Review your loan status three times a year, in depth annually.
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These reviews should include an examination of the diversity in the lender’s loan portfolio and how the current account fits in.
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Talk with alternative lenders frequently. Keep those alternatives warm.
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Small businesses should look at local lenders.
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Field a credible management and advisory team (accountants, consultants, attorneys) which can be called on quickly when and if required.
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If you receive a default notice or your loan is called, consult your attorney before officially responding.
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Timing is important, change your lender before being forced to!
Prepared by Dennis Kraska
Kraska Management Group, Inc.