If you are lending long enough, you are sure to see a strong borrower suffer a financial downturn that pushes your loan relationship into an area of unacceptable risk. Handling a troubled loan relationship most effectively requires a change in focus that may not come naturally to many commercial loan officers.
As a credit situation moves toward workout status, it is important to recognize that you and the borrower are moving from friendly participants in a mutually beneficial relationship to uneasy participants in a potentially damaging relationship.
You will be most successful in reaching a positive outcome for your lending institution if you make conscious effort to understand what may be going on emotionally for the borrower and frame your approach accordingly. In this context, the word "borrower" refers not to legal entity, but rather to the person who owns, or is responsible for, the borrowing company. Whether dealing with an owner/manager or a professional manager, it is important to maintain a constant awareness of what that individual is thinking and feeling on a personal level.
The following points are offered for consideration in establishing an effective relationship with the person responsible for a financially troubled company.
Be aware that what you consider just a matter of business may be highly charged ordeal for the borrower. As a banker, you have a long list of loan customers, and when one is underperforming, it is a relatively serious matter that needs to be addressed and corrected.
For the people responsible for the financially troubled company, it may be their business career at risk or even their personal net worth on the line. Owner/managers in particular usually have a high level of emotional involvement in their businesslike manner.
Remember that the natural reactions to a business setback for the head of a company are denial and procrastination. The borrower is neither stupid nor stubborn just because he or she does not see the problem, insists that there is none, or plans to take care of it tomorrow.
Denial and procrastination are the rule rather than the exception in troubled companies. As banker and problem solver, you know the best way out of financial crisis is a clear assessment of the situation and a decisive action plan. You will be making a strategic error if you assume the borrower shares your awareness of the obvious problems and is ready to make immediate changes.
Be a patient listener and strive for a level of mutual understanding. One of the most effective ways to begin to build a positive relationship in the workout environment is to be willing to listen to the borrower's position and try to see the situation from his viewpoint.
Borrowers often have a need to talk through the circumstances that brought their companies to their financial difficulties and disavow any personal responsibility before they can get on to planning a workout strategy. If the borrower feels that you have provided a chance to tell his story and have some understanding of his position, you have a good chance of avoiding an adversarial relationship from the outset.
Being understanding is not synonymous with being weak. Understanding the borrower's position and having compassion for his emotional state does not mean you will be avoiding the "no" word.
Almost invariably the borrower's initial workout plan involves more business as usual, with the lending institution granting more time or providing additional funding, or both.
The real workout starts when you refuse the borrower's request and insist on a realistic plan for returning the company to financial stability. Be aware that your refusal to provide more time and/or money will likely be perceived as a breaking off of the previous banker-broker cooperative relationship, and may also be perceived as personally threatening the borrower.
Remember that turnarounds take time. Financially troubled companies generally get that way gradually, and the turnaround, likewise, will take weeks or moths to complete. You can be instrumental in effecting the turnaround by letting the borrower know that you understand the turnaround process, and that it should begin immediately.
The basic elements of every turnaround include tight controls on spending, a detailed, realistic plan, and decisive management implementation. Most borrowers, who are not familiar with operating in financial crisis and drafting a hard plan for real change, can benefit from the services of independent specialists in turnaround management.
Establish a new lending relationship. Most lending relationships are based on a bank's making funds available under agreed-upon terms to a company that maintains itself financially within limits.
During the workout period, it is helpful to recognize that the basis for the old relationship has evaporated, but that a new, and still positive, relationship for the workout period can be developed through your efforts.
In troubled loan situations, the most positive relationship is often one in which the lender offers the borrower understanding and cooperation in exchange for immediate action in initiating the turnaround. You can afford to offer the borrower more time (and in some circumstances, more money) as long as you are satisfied the borrower has a firm grasp of the basics of the turnaround process and has made a genuine commitment to immediate action.
Mr. Cross is a principal of Jay Alix & Associates, a turnaround and crisis management firm with offices in Southfield, Mich., and New York.
