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Planning and Managing Your Banking Relationship During COVID-19

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The recent outbreak of COVID-19 has drummed up feelings of uncertainty among individuals and businesses alike. With each passing day, new developments paint bleak pictures of future finances on both personal and organizational levels. We can all agree that everyone has more questions than answers about the best way to move forward into the uncharted waters ahead.

However, there are plenty of actions that you can take today that will help relieve financial stress and set you on a path to continued success. Most of these require very little extra effort on your part, but the payoff can be tremendous. In fact, whether you take action on your finances now could mean the difference between your business thriving into this next decade or closing its doors by the end of the year.

We’ve gathered some of the best ways to ensure your business stays successful through this difficult time and we’re ready to share them with you today.

Our biggest piece of advice to you: be proactive and drive the communication with your banking relationships starting today. You may need to lean on your bank through this time. As you move through these next few months, show your bank that you are prepared by keeping up-to-date with your business finances. You’ll gain the bank’s confidence and prove that your business is reliable, which will help you gain their support during the crisis.

Stay Informed

The best way to start managing your banking relationships right now is to stay informed on what’s happening. You can take some steps to learn how your business appears in the eyes of the bank. That will help you anticipate what the bank may do with your financing in the future.

Ask About Problem Loans in Your Industry

Ask your bank if there are loans in their portfolio that have been downgraded. What industries are being impacted? If other businesses in your industry are at risk of defaulting on loans, your bank may take extra precautions with any/all clients who touch that industry.

The bank could evaluate all the loans from businesses in the “bad/tainted” industry. Unfortunately, this can mean that your business is asked to exit the bank entirely.

Check Risk Ratings on Loans

Every business and real estate loan with the bank has a risk rating. The risk rating determines how much capital the bank must allocate to its loan loss reserve in case the loan goes bad. For example, if a $1 million term loan is assigned a passing risk rating, the bank may only have to reserve 1% of the loan ($10,000). That means the bank would have $10,000 expensed on their income statement for that particular loan in the month the loan is funded.

If that same term loan is downgraded to a “Watch” risk rating, the bank would increase the loan loss reserve to 10%. In that case, the bank would have an additional $90,000 expensed through its income statement during the month of the downgrade.

Why is this important for you?

If the bank begins downgrading your loans and assigns them a higher risk rating, this means the loans are more expensive to the bank and greater risk of write-off. The bank will attempt to pass those costs onto you along with asking you to exit the bank.

Know What Assets are Worth

If you need to apply for additional financing, the bank most likely will ask for collateral. Each bank is different given their credit appetite, but here’s a quick look at what your assets could be worth:

  • Accounts Receivable: 60-80% advanced rate
  • Inventory: 15-50% advanced rate for raw materials and finished goods, though it’s tough to finance inventory unless it’s a commodity
  • Fixed Assets: 50-90% advanced rate, but will require an appraisal
  • New Equipment: 80-95% advanced rate based on the Purchase Order (hard costs)
  • Real Estate: 60-85% advanced rate

Proactive Communication

We can’t stress this enough. Most business loan agreements have a default clause regarding “Insecure” to be an Event of Default. If the bank considers your loan in default because of insecurity, they can demand immediate repayment.

How do you prevent this?

The best way to keep the bank from feeling insecure about your business is to communicate with them. You can request a one-on-one meeting with your banker and their supervisor. Under the current conditions, it may be best to use a video conference technology instead of having a face-to-face meeting.

Talk with your banker about the state of your industry, business and how you’re handling any financial changes. If you plan to draw on your revolving line of credit (RLOC), make sure you communicate your plans to your banker and explain your plan for repayment. Keeping them in the loop will help them feel more secure about your relationship and could prevent them from putting your loan(s) into default.

You may consider inviting your banker to a virtual meeting with some of your other trusted advisors. This could include your CPA, attorney, fractional CFO, and board members. If you work with us already, we should be included as well. If your banker is there, they will further understand what’s happening in your business and how your leadership is taking action.

Read more: Renewing your business line of credit

Update Your Bank Often

Keeping your bank updated on your business financials can help them have confidence in your business. Even if your numbers aren’t where you’d like them to be, being upfront about where your business is can help ease any doubt that the bank has. If a business isn’t willing to share what’s happening, that could mean they’re in trouble.

As you move through uncertainty, continue reporting on a timely basis and within the financial covenant(s). Be proactive with your communication if something is going to be delayed. Instead of reporting information late, request a waiver from the bank ahead of time. It’s a simple step that can help improve the bank’s confidence in your business.

Here are some things you can consider updating with your bank as you move through the next several months:

  • Monthly financial statements, including balance sheets, income statements, inventory reports, budgets and forecasts, AR and AP aging reports
  • Weekly cash flow statements and forecasts
  • Updated personal financial statements on all owners with more than 20% stake in the business

Above all, make sure you’re providing any information that the bank requests in a timely manner.

Update Financing

The need for additional financing, or to modify existing terms, might arise as you move through the next several months. Even if you don’t believe it will, it can be a good idea to request extended loan terms now in order to prepare. The banks could get overwhelmed with requests over the next several months. If you can be proactive and start requesting amended loan terms or additional financing now, it can help you secure funds that may be unavailable to you later in the year.

What’s the best way to do this?

Before you approach your bank with the request, make sure you’ve built a strong case. Doing your homework and preparing for the meeting will help communicate that you are leading your business to your banker. You’ll build trust and credibility with the extra effort, which can increase your chances of being approved.

When you do have the meeting, request that the decision-maker attend the meeting. That may be the credit officer, bank president, or other executives at the bank. Present your case to them, including your cash flow and repayment sources. Explain your plan for debt servicing the additional debt and also provide a 12-month budget to further demonstrate how your business will be able to cover the financing.

Read More: How to create the perfect budget for your business

Take Action and Plan for the Future

As you move through the next several months, there are a few things your business can do to keep things moving smoothly.

Rely on Owner(s)

The owner(s) of your business may have some personal funds/ assets available that they could loan the business in order to keep the doors open. You can either consider this as paid-in capital or subordinated debt (consultant your tax CPA).

If you choose to use the funds as a subordinated debt, make sure you properly document it. Allow the bank to subordinate it to the bank’s debt, which shows that your business is willing to do what it takes to strengthen your relationship with the bank.

Reduce Cash Outflows

This can seem like an obvious, yet difficult, solution to financing problems. Reducing cash flows should be done carefully and cautiously.

What’s the best place to start?

Determine how much cash your owner(s) need to live each month. Then, you can defer their salary and/or distributions until later in order to cover more urgent cash outflows today. Just make sure you have this properly documented on the balance sheet so there are no questions later. Don’t forget to communicate this plan of action with your lenders.

Reach Out for Help

If you feel uncertain during these times, you’re not alone. Know that you can enlist the help of a specialized business partner to get you through all of this. A business advisor can help guide your business on the right path and help you keep your doors open during this uncertain time.

What could Signature Analytics do for your business?

  • Evaluate your current financial state
  • Forecasting to understand future financing needs
  • Assistance with budgeting
  • Help secure additional financing
  • Negotiate loan terms
  • Strengthen your relationship with the bank

SA can help you understand what kind of changes you need to make today in order to stay ahead of the game. Having a team of strategic thinkers in your corner will help steer your business toward a path of success.

Final Thoughts

Being proactive is essential during uncertainty. Banking relationships will be crucial as you move through the next several months. In order to stay on good terms, you can take a few extra steps in order to strengthen trust with the bank.

Communicate with your bank often and update them on what’s happening in your business. Request extended terms or additional financing now to beat the rush in the coming months. As always, lean on experts when you feel unsure of what to do next.

If you need support getting your financial information in order, contact us right away. We can be your partner in communicating with your bank and other financial relationships ensuring the right information is provided when the bank needs it.

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