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