Here's a lesson in crisis management. Assume the sagging economy is taking its toll on your business, trimming back sales and profits from the record levels of recent years. Faced with a diminishing cash flow, you are hard-pressed to repay the loans and lines of credit secured in more optimistic times. With your financing, credit rating and even your survival at stake, you need to take decisive action to prevent a bad situation from turning into a nightmare.
That's where crisis management comes in. In this case, that means maintaining credibility with your bankers in spite of your company's economic woes.
"This is more critical today than at any time in recent years," says Martin Zelbow, who specializes in guiding troubled companies. "Before the current credit crunch, banks were often lenient with borrowers who needed assistance in meeting their obligations. But today their attitude is much tougher. Unless troubled borrowers take swift action to come into compliance with all of their loan requirements, they run the risk of having their loans called and their bank deposits seized."
These steps can help to safeguard your banking relationships in difficult times:
* At the first sign of trouble, arrange a meeting with your banker, using the opportunity to present a clear and honest picture of your financial condition. If you are having difficulty meeting your current obligations and need assistance in restructuring the debt, try to make the banker see that your problems are due to a specific hardship that can and will be overcome. For example, if a sudden bankruptcy of a major customer has deprived you of substantial revenues, identify this setback as the source of your ills. Evidence that your debt payment problems are not the result a general decline in business may encourage the bankers to work with you through a rough period.
* Develop a plan for reversing your company's fortunes bcutting costs and boosting revenues. Put this action program into writing and present it to your banker. Cite business objectives, timetables for achieving them, methodology and financial projections.
When a beleaguered computer consulting company was hit hard by a downturn in the financial services industry, management devised a plan to compensate for this by marketing its services ** to the fast-growing health-care industry. By showing how the company planned to win over new clients among medical and dental practices, management persuaded its bankers to stretch out the payment terms of the company's debt.
* Demonstrate that you are in tune with your banker's concerns by preparing a "worst-case scenario" for his review. This shows what you will do to repay your debt even if the company's plans go awry and results fail to measure up to projections. You'll want to indicate that if all else fails you will close down money-losing operations, sell off assets for cash or even arrange for the orderly liquidation of the business.
"The bankers will be looking for absolute comfort that assets sold at auction will bring sufficient sums to repay the loan," Mr. Zelbow says. "What complicates this is that asset values including equipment, real estate and inventory have dropped substantially in the current market. This means the principals may be asked to add more personal assets to the collateral pool."
* No matter how bad the situation becomes, avoid the temptation to hide from your banker. The failure to return telephone calls or to provide ongoing financial data is a red flag that prompts lenders to protect their interest.
"Try to hide from bankers in this environment and they will likely foreclose on your loan before you know what hits you," Mr. Zelbow warns. "What's more, they will dismiss any belated attempts to make amends and to work out a compromise.