Our friends at Revitalization Partners help companies make better decisions about business operations. This blog from their newsletter focuses on lender fatigue and how banks decide they no longer want your company’s business. At Juniper Capital, we are committed to sharing business advice that helps you achieve success. We fund real estate investments with hard money loans in Washington, Oregon, and Idaho. Share your thoughts on this blog, so we can continue to provide you with quality information for operating your business in the Pacific Northwest:
Back in 2012, you may recall that Bank of America made headlines by capping and restricting credit lines and presenting accelerated payment plans for a large number of its small and mid-sized business users. The move came as a complete surprise to these business owners, many of them had very longstanding business relationships with the bank. In addition, the economy was in a rebound and economic forecasts for 2012 were encouraging. Could these businesses have predicted a falling out with BOA?
The answer is… maybe. And because some of the same conditions exist for companies today, as well as a few more influences on the banks, we can expect to see more issues of lender fatigue today.
Let’s look at some of the factors that cause lender fatigue. First is an underperforming year. Not necessarily a bad year, but a bad year relative to your forecast. Business owners often produce forecasts that predict high growth or increased margins and/or profitability that they believe will impress the bank. And when the company falls short or a capital investment or significant business strategy doesn’t work out as projected, the bank finds itself spending more time discussing your loan with regulators.
Because smaller businesses have a smaller “capital cushion” to deal with problems, they are considered more vulnerable and therefore, riskier. If your bank interprets a revenue or profit shortfall against projections as an operational issue, they spend more time evaluating the loan, meaning less profit for the bank. Margin shortfalls create a heightened sensitivity. Shrinking margins, even in the face of increased revenue, are also a red flag for a lender.
Another cause of lender fatigue is depreciating collateral. In any kind of crunch, assets and therefore collateral may take a valuation hit. If the value of your collateral has declined, especially if the decline is significant, regulators may pressure the bank to increase its reserves against your loan. This causes the bank to pressure you for additional collateral or to just pull the plug altogether.
Other factors that may lead to lender fatigue include a high level of customer concentration, poor communication between you and the bank and, one that we hear often lately, “loss of confidence.”
Regardless of the size of your company, you should surround yourself with credible managers and advisors. In times when your bank relationship causes doubt, your lender will take great comfort in knowing that you are working with the right accountants, consultants, and attorneys. This confidence instills a lack of worry and a lack of worry helps banks avoid lender fatigue.
Certainly, businesses cannot always predict their lender’s moves, but they can be proactive about finding alternative sources of funding. At least once a year, you should examine your access to capital and how your loan fits with your current lender portfolio.
To maximize opportunities for new credit, a business should take a diverse approach to sourcing capital. That may mean calling in an intermediary with access to different sources and types of lenders. If your business is very creditworthy, it may be just talking with a few bankers. Note that the interest rate is not the most important thing to consider. Be sure to examine such details as prepayment penalties, loan covenants, and the reputation of the lender for patience in difficult times.
There are many sources of alternative capital available to small and mid-sized business. You should know what is available and most importantly where you stand with your current lender. As we see more pressure on commercial banks by regulators, there will be more banks with lenders fatigue. But given the diverse and large amount of alternative financing available today, it may be that your “borrowers fatigue” controls the situation.
Revitalization Partners is a Pacific Northwest business advisory and restructuring management firm with a track record of achieving the best possible outcomes for clients. They specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Contact Revitalization Partners if you want the best resolution in the fastest time with the highest possible return.
Revitalization Partners… when a company is worth saving.