| Most business owners and financial managers | | | | – it’s clearly a case where both parties |
| aren’t necessarily aware of the methods and | | | | have a lot to lose. However if a bank feels on a |
| factors that banks utilize to control and monitor | | | | number of fronts that the customer is spiraling |
| their loan facilities with commercial customers. | | | | downward they will take steps to ensure their |
| We are talking about two types of loans | | | | loans are provided for. |
| essentially, term loans, and also operating lines of | | | | What are some of those downward spiraling |
| credit, also called ‘ revolvers ‘ by some | | | | scenarios? They include: |
| . (Revolver – the credit line revolves, it goes | | | | Cash flow deterioration |
| up and down on a daily basis ...) | | | | Asset erosion |
| Banks essentially use several different strategies | | | | Working capital problems |
| to ensure they have maximum control and | | | | Again, the worst case scenario is the bank |
| influence on the business borrower. | | | | ‘calling the loan ‘. We have agreed this |
| Banks often are reluctant to allow maximized | | | | benefits no one, so the bank usually prefers (as |
| borrowing from other parties for asset growth. | | | | does the customer!) to return to the bargaining |
| Why? This is because when a customer has to | | | | table. At this time business owners are strongly |
| service the additional non- bank debt they might | | | | cautioned to prepare a corrective action scenario |
| be unable to service the banks loans. Banks | | | | to satisfy the bank. It is at this time that the |
| have very well known and published cash flow | | | | bank normally considers an interest rate increase, |
| ration and they want to ensure their customers | | | | or more restrictive covenants. |
| can meet these rations on the bank debt. | | | | We also want to point out to business owners |
| Naturally if a bank feels comfortable with a | | | | that banks want to ensure that there is a |
| customer growth and cash flow profits they are | | | | proper ‘ matching ‘ of financing . By |
| much more likely to approve a third party | | | | that we mean that the bank does not want the |
| financing . If they aren’t comfortable they | | | | customer to borrow short term to finance long |
| may ask the company to at lease temporarily | | | | term scenarios. For this reason working capital |
| defer bonuses, dividends, or, in the case of a | | | | ratios are put into place. |
| public company, a stock repurchase. | | | | Finally banks utilize whets known as a |
| Bankers of course usually know the company | | | | ‘negative pledge ‘clause. This forces the |
| very well, as a relationship and financial history has | | | | company to consult the bank when pledging other |
| developed over the years. They will often want | | | | assets or selling unencumbered assets. If such |
| to have input into the company’s growth | | | | sales are agreed to the proceeds are usually used |
| direction in an effort to ensure the customer is | | | | pay down the bank. |
| not going down a path that in their opinion, might | | | | In summary, it benefits business owners to |
| lead to liquidity loss or profitability loss. This sort | | | | understand the whys and wherefores of bank |
| of ‘advice’ from a bank can come in a | | | | strategy and influence and control around business |
| number of manners, one of which is simply | | | | loan scenarios. Understand where the bank is |
| providing a debt to equity ratio that cannot be | | | | coming from allows a business owner to more |
| overlooked by the customer. | | | | proactively plan financing growth with a view |
| Business owners know that it is no ones best | | | | towards successful financing. |
| interest for the bank to trigger a default on a loan | | | | |