Our friends at Revitalization Partners help companies make better decisions about business operations. This blog from their newsletter focuses on the new regulatory environment for banks and how small to mid-sized businesses should interact with lenders when a separation is pending. At Juniper Capital, we are committed to sharing business advice that helps you maintain business success. as alternative lenders in Seattle, we specialize in real estate investments with private 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:
Following the last financial crisis, the focus on the safety and soundness of banks was good for the financial system. New bank liquidity and capital policies, among other things, strengthened a weakened system. The banking system today is stronger, with more assets and better loan underwriting standards.
Despite good intentions though, a compromise of regulation and politics created a new and untested regulatory framework that could have unintended consequences for financial markets, especially for small and mid-sized businesses. The Volker Rule, for example, bans propriety trading by banks. When combined with enhanced capital and liquidity requirements, this has led banks to avoid some activities in key equity and debt markets.
Why should small to mid-sized business care? Because they are the most vulnerable. New capital, liquidity, and trading rules for banks are interrelated and falling security values and highly tightened markets force banks to reduce assets and hoard their liquidity in order to pass regulatory tests. If banks and the companies they serve are not able to raise capital in a weak market, the resulting contractions in loans leads to reduction in spending, layoffs and pain for middle America.
Small businesses are especially impacted by this. Studies by Harvard University and the Richmond Federal Reserve have concluded that the Dodd Frank financial law has impacted regional and community banks disproportionally. Between 2007 and 2013, the number of community banks declined by 41%. These banks make up a significant amount of lending in community real estate, agriculture, and small to mid-sized businesses.
Although many banks continued to lend in the 2008 crisis, the next time, the new capital and regulatory environment will cause banks to retain more capital with an eye toward satisfying regulators. This is instead of meeting the needs of their customers. The larger banks will need to focus on preserving more capital because the new rules require them to revalue assets as they become riskier, while decreasing their capital reserves from unrealized securities losses. If banks, both small and large, reduce their lending, customers will have a more difficult time finding loans in a declining market. While non-bank lenders and financial institutions are a potential source of credit, their overall lending capacity is not sufficient to cover the shortfall.
While news reports announce that regulators are urging banks to lend money, the banks themselves feel regulatory field forces are exerting great pressure to eliminate questionable loans and increase capital reserves. As individual customer credits are more scrutinized, bankers are often torn between the corporate need to maintain the customer and the regulating effect on capital reserves. So the message to the customer remains mixed regarding the status of a loan that the regulators determine is risky.
How should a borrower behave if they are in technical or actual default of a loan? The first thing to realize that it does happen and most banks are prepared to work with you… once! A single forbearance agreement need not be the end of your relationship with the bank. However, at the end of that first forbearance agreement, if your loan is not in compliance, it’s time to take other action.
First, make certain your bank knows you understand the seriousness of the situation. Let them know you understand that you may need a new lender and that you want their assistance in the transition. Just as you have a problem, your banker has a problem and demonstrating an understanding of that problem and desire to solve it goes a long way. Make certain you not only talk with the banker handling your loan, but with the credit officer as well. He or she can play an important role in the management of your account.
If you’re a banker working with a borrower with a troubled loan, the most important thing is to make certain your borrower completely understands both the terms of the forbearance agreement and the position of the bank regarding the overall credit. Many borrowers do not understand the severity or urgency of the situation and the sooner you are clear, the more time a borrower has to meet their borrowing needs.
There are lenders for almost every business and the important thing is to find the lender that fits your situation. Demonstrating to your current bank that you understand the issues and keeping them apprised of both your current business situation and your efforts to solve the problem can insure a smooth separation and mutual understanding. Because, who knows, the day may come when you’re happily back together again.
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.
