Are You Prepared for the Challenges Your Borrowers Are Facing?
Frank Goldberg
Briar Capital
Houston, Texas
www.briarcapital.com
Record gas prices. Increased competition, both foreign and domestic. Slowing sales. Rising raw material prices. Tighter margins. Certainly your loan customers are feeling the impact of today’s challenging economic environment. However, the bigger question is, what are you as a banking professional doing to meet these challenges and fill the role of a resource your customers can count on for honest guidance?
Borrowers don’t need a cheerleader during tough economic times. They need a trusted resource they can count on to address their ever-changing business challenges. Here’s how you can step in and fill that role.
Conduct closer, more detailed communication with your loan customers.
Make sure you are up to date on each of your customers’ current and future business challenges. These hurdles may come in the form of slowing sales, increased costs, decreased margins, or new competition. For example, a U.S. manufacturer may soon find itself competing with an overseas manufacturer in China. In order to succeed, the U.S. company will have to decide how to compete in areas other than price. It may be able to compete with quicker turnaround time or by manufacturing a specialized item instead of a mass-produced product. Still another possibility is for the business to transition its model from a pure manufacturing operation to a manufacturing and distribution operation in order to import materials when it can’t compete with foreign competition on price. Instead of competing head to head, the business can position itself to distribute and benefit from the foreign-made product.
Spend more time understanding your collateral and the market conditions your customer is in. Has the borrower’s collateral maintained its loan value since you first made the loan? If not, work towards securing additional collateral, cash or equity, or lowering your advance rate. This is particularly the case in commercial real estate where the value of property used for collateral has decreased considerably in some markets. An 80% LTV might in fact be a 100% LTV.
Monitor your borrowers’ cash flow more closely. Look closely at sources and review a company’s prospects going forward. If net income is going down, then perhaps the terms of the credit agreement should be modified. Other steps also may need to be considered. For a manufacturer facing declining sales, we recommended the company lower its inventory investment and maintain lower inventory levels. The company may also cut expenses by transitioning to half shifts and outsourcing its once full-time bookkeeping functions.
Take a more proactive role in verifying receivables, tracking inventory and reconciling cash on hand. A financial statement doesn’t tell the whole story. Talk to suppliers and find out what kind of terms the company has with them. Verify payables and make sure payroll taxes have been paid. If not, that’s the first warning sign of a business in trouble. Find a partner to help. Identify professionals who can help you through the process of addressing your customers’ new business challenges. Contact a turnaround management specialist or a restructuring professional who can examine a borrower’s situation. Or, you may choose to work with an asset-based lender who can perhaps take the loan off your books.
Remember, red flags have to be investigated more thoroughly during challenging economic times. Don’t wait for the problem to come to you. You need to go to the problem. And above all, conduct upfront, candid communications with your customers. Asking questions won’t destroy relationships with your borrowers, it will enhance them. You are a resource to your borrowers. Be an honest resource – that’s the best way to help your customers meet the challenges of today’s economic environment.
About the author: Frank Goldberg (fgoldberg@briarcapital.com) is chairman and CEO of Houston-based Briar Capital, LP, an asset-based, non-bank lender. He has served in the banking industry since 1970 and founded Fondren National Bank in Houston, TX, in 1985 and later founded CompuBank.
