3 Nov 2009
As everyone in business realizes, the current global economy is unlike any that most of us have seen in our careers. Many of these factors are beyond our control—massive company closings and downsizings, foreign competition, the fallout from disastrous Wall Street decision making, and on and on. Any or all of these can impact the collectability of your Commercial & Industrial portfolio, which can be challenging even in the best economy. But what about opportunities that ARE under your control to maximize recovery…is your group doing everything they can to make this happen?
At Evans & Associates, we work with a wide variety of industries and company sizes, nearly all of which are facing severe economic and profitability challenges. In the last few months, we have noticed a troubling trend: many companies, in a last-ditch effort to stave off presumed bank-mandated liquidation or asset seizure, have floated to the most critical stages of insolvency with one common thread: they stay current only with their payments to the bank, and nearly all of them only making minimum payments.
The troubling part is not that these troubled lender situations exist in some quantity, as they always will, as long as lending exists. What is troubling, however, is that these companies are so far underwater that there is virtually no chance for them to succeed long term, and your loans that appear to be current will go directly into your liquidation group. NONE of these companies had received any correspondence from their bank indicating any problem, even though these loans are nearly worthless at this point. There is less than nothing left!
Note that our experience with these companies goes across many industries and many banks—local, regional, national, and international. The cold hard facts are that these desperate companies have found a loophole to keep you, the presumably secured Lender, in the dark while surreptitiously borrowing from unsecured vendors, landlords, employees, and contractors.
What should lenders do differently?
- Think like a troubled borrower! If you allow lax enforcement of your lending agreement, be prepared to deal with the consequences.
- Require timely financial reporting, per your agreement, and ensure it is reviewed in a timely fashion. Troubled companies simply don’t report when they know it will bring questions and they dare you to challenge them. Every incident that we mention above shared this common trait.
- Intensely review your internal policies to detect these issues with urgency. Every bank is different, but we have not found any to be foolproof.
- Ask for help. We at Evans & Associates offer a no-cost consultation with companies whose business is declining.
You cannot control every item in the lending relationship, but you must control what you can control. Hold your debtors to the same business standards that you are held to by your executives and regulators…with urgency!
Michael A. Evans