Hiding from the bank? Here’s what you need to know

Banks can be a small business owner’s best ally, providing financing for big projects and helping to ease cash flow for day-to-day needs. But when the books are in the red and unpaid bills keep piling up, a letter or phone call from the bank can seem like a hostile gesture.

Many owners react by hiding from their banks. Some may even start to view their account managers as adversaries who don’t understand the challenges of running a small business.

What’s behind these run-and-hide reactions? In most cases, the reason is a lack of knowledge about what a bank might do when a small business falls behind with its payments. That’s why it’s important for owners to understand not only what their lender can do to struggling companies, but also what account managers are most likely to do in these difficult situations.

Banks want to help you find solutions

Banks are all fighting for market share. When a business customer gets in trouble, most account managers will want to work with the company to find a solution. This could mean putting in place a payment arrangement, or mapping out a cash flow projection to help return the business to a better place. For these solutions to happen, however, business owners need to keep the lines of communication open with their bank.

When problems persist: The next step

When a business customer continues to struggle, the bank will likely move the account to its special loans group or special accounts management group, a division that deals with distressed accounts. As part of this move, the bank may ask the business to sign a Forbearance Agreement, which delays the bank’s push towards calling the loan or appointing a receiver in exchange for the company agreeing to take certain steps to gets its finances and payments back on track.

Calling the loan – and the receiver

In a worst-case scenario where the bank views the business as unlikely to recover, the usual next move is to call the loan. For the business owner, this means finding another lender to cover the balance. If no lender steps up, the bank could decide to appoint a receiver who will shut the business down and sell its’ assets.

Minimizing the damage: What you can do

It’s good to know what the bank can do when your company is struggling. But it’s even more critical for small business owners to get help from a professional—such as a Licensed Insolvency Trustee or business restructuring expert—who can guide them through these tough times and help restore the bank’s faith in the business. These specialists can help:

• analyze the business and create a plan. For instance, a professional can help focus on the right costs to reduce or help the business prioritize paying down debts to CRA. Or maybe the business needs to revise payment terms with its customers so the cheques come in sooner. Having a plan in hand can help business owners ease their account manager’s concerns and keep them onside as a supportive ally.
• represent the business in meetings with the bank. The bank will feel much more comfortable dealing with a customer if it knows they are getting professional help. Often, a Licensed Insolvency Trustee has a better understanding of what the bank is concerned with. They can work with the company to develop a plan that deals with the bank’s concerns and translate to the business owner the bank’s priorities.
• arrange financing with another lender. Experienced Licensed Insolvency Trustees or restructuring professionals are tapped into a network that includes banks and alternative lenders who will pay out the bank loan. In many cases, business owners also prefer to switch lenders even if they foresee a recovery in their finances.
• provide information and advice. It’s important for business owners to understand their rights and responsibilities under the terms of their banking agreements. A Licensed Insolvency Trustee can explain this information, lay out all the options available, and guide owners towards the best course of action for their business.

Let the bank know you’re taking it seriously

When you bring in professionals to help you analyze your company’s financial challenges and create a plan, you’re sending a clear signal to the bank—and to other relevant parties—that you’re serious about finding a solution. Dealing with a bank when your business is in financial trouble isn’t easy, but having the right ally on your side can make all the difference for you and your company.