It's hard to think of a banker being associated with anything to do with 'tough love'.
Okay, so maybe the tough part, but love?
But really the customer relationship is akin to a marriage – it's all about mutual interest.
More than anyone, the bank usually has its own money at risk in your business.
So when this partner starts asking hard questions about how well you are prepared for that next step, they are doing it for all the right reasons.
Some customers have endured tough times during the past three to four years. But how their banks have reacted most likely was influenced by the way customers have communicated. In cases where communication has been open and two-way, banks will have had the opportunity to work with their customers and look at options to navigate through tough issues.
Here's what we mean by two-way communication:
* Making sure your financial information is robust, accurate, realistic and available;
* Providing both historical and budget information and covenant reporting as promised and on time. It's also important that customers can explain significant variances to budgets;
* Updating business plans and sharing that information, or involving the bank in the updating exercise;
* Advising, ahead of time, when debt is going to overrun (outside of contractual arrangements) or breaches covenants will occur;
* Making sure that bank funds are only used for the purposes for which they were borrowed;
* Identifying any issues proactively and developing solutions in partnership with the bank;
* Ensuring there are no surprises. Holding off telling bad news can make the situation worse;
When business was booming, some of these disciplines may have fallen by the wayside.
Now is the time to resurrect them.
What's forcing the banker's hand?
Some of the factors influencing the 'tough love' approach include:
* More conservative debt multiples (against cash flow) and percentages of lending against specific assets e.g. land and buildings;
* The need for the customer to include some of their own funds in investments. There has also been a return to the inclusion of equity ratios as one of the covenants in deals;
* A need in some instances for customers to repay a portion of debt;
* A move back to core principles of banking, which include having more than one way out for debt repayment. This could be a combination of cash flow, sale of assets, sale of business or the ability of shareholders or guarantors to make appropriate contributions; and
* The increased cost of bank funding influenced by investor and depositor returns, competition for funds and Reserve Bank of New Zealand capital requirements.
Will the situation change?
Only time will tell.
But in the meantime, if you haven't talked to your bank of late, change that now.
Mike Atkinson is a senior business improvement manager at Bellingham Wallace.
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