Business on a Cliff Edge, worried about the Bank?

The COVID-crisis thus far (March to end of August 2020 as I write this), the banks have been mostly focused on helping to keep their clients’ heads above water with band-aids, along with the band-aids provided by the Federal & State Governments.

But how they act over the coming months will be “interesting” to watch.

Particularly how they review the financial statements of their borrowers for June and September quarter covenants. Will they ignore those quarters as being extraordinary circumstances? Or will “blind box ticking” lead to covenant breaches being issued?

We’ve written in the past about clients being too comfortable about the strength of their relationship with their bank, which then proves to be not so strong – whether because of approvals being withdrawn, or impractical T&Cs, or “lazy tax” pricing (we’ve seen a LOT of the latter!).

Based upon what we’re seeing thus far, we are absolutely expecting banking relationships to mean even less as we enter this economic recession, as bankers are given instructions from the hierarchy above to clean up the balance sheet (equals put the squeeze on “distressed clients”, in banking speak: “exit the client”).

So what should you do, if you’re not absolutely unequivocally 100% certain that your bank will look after you?

Be on the front foot.

Do NOT wait and hope that your bank & banker will support you.

We all know that a business or project with no strategy, that just relies on making it up as you go along and a “she’ll be right” attitude, does not deliver ideal outcomes. So why do it with one of your most critical suppliers & relationships (which is precisely what your debt provider is), especially at a period in time whereby the economy carries more uncertainty than ever.

Let’s start with what bankers want to see – what gives them comfort and holds them back from panic stations:

  1. Financial forecasts, that are:
    • Realistic (as much as can be in the face of uncertainty, but at least not pie-in-the-sky wishful thinking) and
    • Quality & detail commensurate with the size and complexity of your business (e.g. a simple profit & loss forecast is NOT sufficient for a business with a turnover of $20m or more)
  2. Communicate with your bankers:
    • Clearly, regularly and with conviction.
    • Be open & honest, with a collaborative approach.
    • However we will add one caveat to this [although I’m certainly NOT suggesting that you should ever be dishonest or hide anything from your bank] – just as with any sort of politics or negotiation, vomiting out every piece of information without regard for how it will be construed or the consequences thereof, can result in an absolute train-wreck. So be very careful about how information is presented, if in doubt, see next point:   
  3. Get Advice, earlier is better:
    • If you’re not 100% confident in your own ability/experience in such a situation, get advice from people who have (yes, that’s a shameless plug for ourselves).

The Best Solution is Always:

There isn’t one.

But you do need to work out a clear strategy for what/why/when/how. Every situation is different and, therefore, so should the strategies and solutions. And then, most importantly:

Execute effectively. I can’t stress this enough; one of my MBA lecturers pummelled this into my memory, never to be forgotten: “most strategies fail because of failure to execute effectively”. Reflect on that for a second – how often does a huge amount of effort go into strategic planning, to then all fall apart because of distractions and lack of focus & diligence?
The answer is, most of the time.

“I just need an increase to my Overdraft”

… is the solution most think of first… But it’s rarely the best; certainly in isolation without consideration for what else needs to, or can, be done.

So what is the solution? The more important question is, “who should I turn to, to help me work out the best solutions?”. Here’s some to think about:

  • Your Banker?  No. Unless you REALLY trust them implicitly and you’re totally confident that they’re the kind of banker who cares more about you than the organisation that pays their salary (keep in mind, they’re paid to look after the bank first, you second).
  • Your Accountant:  Usually seen as the #1 trusted advisor, they’re generally the financial professional who has the best knowledge of your business AND is only on your side. Caveat here is that the capabilities of are accountants in dealing with tricky situations, vary wildly. The best are outstanding business advisors, the worst are only good for preparing tax returns; where on the spectrum does your accountant lie? (accountants reading this: excuse the pun!)
  • Lawyers & Insolvency Practitioners:  Don’t turn to your Dennis Denuto, but a lawyer that specialises in insolvency & restructuring (no, this does not mean that all they’ll do is tip you into administration/receivership!). They can advise you on the various options that may be available, depending on your circumstances, to get you out the other end in the best manner possible. Some pretty tricky things can be put together by clever lawyers & insolvency practitioners (e.g. “DOCA’s”) to keep your head above water and hold the wolves at bay, whilst protecting you as a Director & Shareholder (and potentially Guarantor).
  • CxO/Business Consultants:  These come in all forms – there are some that are ex-CFOs that provide financial strategy advice/support, others are ex-CEO/COOs focused on other non-financial factors (i.e. other underlying strategic problems in the business, where money is just the result of other things going wrong), some are specifically focused on “turn-arounds”, whilst other consultants might be for fixing known specific issues.
  • Capital Advisors:  Partly another shameless self-plug – but we’re the first to put our hands up and say that we’re not necessarily the only solution. If the capital restructure/injection requires raising true equity, we’ll always bring in another advisor that specialises in that. That aside, we’ve never worked alone where businesses have been facing serious challenges – we will always work collaboratively with other professionals such as those I’ve mentioned above.

Funding for Turn-Arounds & Distressed Situations

No matter what the strategy is, often the money does need to come from somewhere to facilitate the strategy.

The first preference is generally to get the existing banks/lenders to assist, but sometimes that’s just not going to happen.

Whether it’s negotiating with the existing banks/lenders, or sourcing new debt capital from alternative funding sources to support a restructure or turnaround/improvement strategy, at STAC Capital we have the experience to support businesses (generally with turnover more than $10m) and property developers/owners, along with relationships with a whole raft of various types of lenders who have the appetite to support such transactions; such as an example we undertook not long before COVID hit.

If you are facing issues and are not sure what the best strategies may be, feel free to pick up the phone and have an obligation-free chat with us about the situation.

If you’re a professional looking after your business/corporate or property client, we understand the sensitive nature that these matters generally are, so we’re always happy to have these initial discussions on a discrete or “no-names” basis.

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