Dealing with Your Bank during Difficult Times: William M. Reghitto, former Executive Vice President, Commercial Lending Group, State Street Bank.
In each issue, we interview a Senior Executive to talk about their business perspectives. This issue we are talking with William M. Reghitto, former Executive Vice President, Commercial Banking Group, State Street Bank. He was also a member of the Senior Executive Group, the bank’s executive management and decision-making body. Mr. Reghitto is a Director and member of the Executive Committee of the Massachusetts Business Development Corporation; a Director of Brewster Wallpaper Corporation; and an advisory board member of Automotive Management, Inc. He currently serves as a consultant to the management of middle market and large corporations, assisting them with financial and management issues, as well as strategic guidance in their dealings with financial institutions.
In your experience, when times get tough for a small to mid-sized business, what financial concerns or misconceptions do CEOs and owners have about working with their bank through this period?
Having a financial problem is one of the biggest traumas a management team can go through. Most likely it’s an earnings problem which ultimately migrates down through the rest of the business. As you are trying to grapple with the issue, you may suddenly get a call from your banker who introduces you to someone you never met before. Before you know it, you end up dealing with a workout officer whose main responsibility is to protect the bank.
Business owners should understand that banks have personalities. Once you learn about the banks’ personality, then, if your company has problems, you need to deal with the workout officer’s personality as well. Banks are generally quick on the trigger when there is an issue, especially those who provide significant credit up front. These banks are great on the way in, because you can maximize your credit. But the downside is that when there is a problem, the bank has less running room and time to work with you. At the first sign of trouble, they need to react quickly, and they probably will.
There is always the chance that you will have a good workout officer who tries his/her best to work with your company to find a solution to your issues, and keep you as a customer. But alternatively, there are other officers who are ruthless and cold and could care less about you, the customer. Their sole concern is getting the money back to the bank as soon as possible. Therein lies the problem! Hopefully, you and your banker have been talking regularly all along about the earnings, how the business is going, and other business issues. But when an adverse event happens, perhaps a bad quarter, or a big order you were depending on that didn’t come through, customers who are late with payments, you should call your banker and let him/her know. But if you wait until you have to call on a Wednesday and tell them that you are going to need $200,000 on Friday for payroll, you will cause both a shock to the banker and create an even bigger issue for your company. Bankers don’t like surprises!
Once you’re faced with something like this, I recommend that you regroup with your business advisors – primarily your lawyer and accountant. At this juncture, your bank will want more information: detailed cash flows, as well as detailed plans on how you’re going to alleviate the problem. This is a time when you need to rely on your advisors. Why? Because this is not business as usual. You must realize that you don’t have the same latitude you are used to having with your customers and your suppliers. Your cash flow is down, you can’t fulfill orders, or pay suppliers because the bank is looking to reduce its loan, not increase it. If you’re borrowing money on a formula (a percentage against receivables and inventory) your bank is going to re-evaluate it periodically, or conversely, if you’re outside the formula, they are going to ask you how you plan to get back in formula. How are you going to get the loan balance down? How are you going to pay back the loan?
In addition, it is likely that the bank will want (require) you to have an outside financial advisor to assist management in developing the detailed financial and operational information the bank will want. The bank will likely give you a list of companies / individuals to choose from and ask your own advisors for names of individuals / companies they have done business with. Negotiate with the bank to allow you to choose the one that you feel fits your company best, but keep in mind the bank will most likely want one of “their guys.”
The challenge for many business owners is that none of this has anything to do with satisfying the customer. This mindset is totally foreign to most managers because it isn’t a normal occurrence. The shock of having to focus on the bank’s needs instead of your customers’ needs has the potential to create negativity. You need to be careful not to build an adversarial relationship with the bank’s workout officer, which means you may have to bite your tongue a bit. You may think the bank is being unrealistic or unfair to your business, your customers, and your employees. You may hate them. They may even be rude and obnoxious. But you have to do your best not to develop an adversarial relationship with them, even if it is justified. The same goes for your advisors. It may be beneficial to put the issue in the hands of your advisors who may be more objective during a time when you are stressed and feeling pressured by the bank. The good news is that there are some very good institutions and workout people who will truly work with you to develop a strategy to help you get back in formula and make it a good loan again. If you’re open and honest with them, you will hopefully be fine. Assuming that the business is basically solid, and management is capable and honest, there isn’t a true business problem that can’t be fixed.
It is not a good strategy to delay talking to the bank, thinking you can work it out yourself. Banks are going to be looking for information. Quarterly information is the minimum that banks are looking for but usually it’s monthly. They can see a problem pretty quickly. It usually manifests itself in earnings, cash flow or the lending formula. If your payables are stretching out, they will see it. The best way to go is to be proactive and call them. Tell them that you need to talk, and come prepared with a presentation laying out the problem and a potential solution(s). Usually this is asking for more money which the bank may or may not want to do. But the reality is that you can only hide a problem for so long. At best, you may buy yourself a week or two. You’d be wise to formulate a solution during that time. It’s going to be hard, because often the issue is one of getting more equity which not every company has available to them. The fact is that the time you need more equity or debt, you are least likely to get it. It’s between you, or the bank, or both of you working together to get the company and the loan back on track again.
What are the top 3 things a business should consider to manage through a financially difficult time?
1. Cash is king when you have a problem. You must marshal cash and spend only what you need to spend.
The bank is going to want your cash. The trade is going to want your cash. You have to pay employees. Sometimes bankers hear: “But if I don’t spend this now, I’m going to have a problem five years from now.” Frankly, that’s too bad. You simply don’t have the ability to plan that far ahead when there is a cash problem now. If you don’t figure a way to cross the moat today, you won’t have to worry about storming the castle tomorrow. You need to be in survival mode, given that the bank is looking over your shoulder. Even the best bank won’t let you spend money that isn’t addressing the problem at hand.
2. Develop a relationship with your banker.
Workout officers may not be the friendliest folks in the world, but you need to build a real relationship with them and understand their expectations. The biggest fear that most business owners have is that they are going to lose their business and that the bank is going to shut them down. Depending on the workout officer, that might be a valid concern. The better relationship you have with your banker, the easier it will be for you to work with them.
3. Take a critical look at your business.
Where is your business today? This is a time when you really need to include your advisors to help balance your perspective on what is really going on. If this is your first time dealing with the bank during a tough time, the chances are that it isn’t the first time for your lawyer or accountant. So it’s important to sit down and discuss this with your advisors first. Their knowledge, experience, and perspective are crucial both prior and during your working with the bank to resolve your situation. Going it alone can potentially make the situation much worse.
What kind of planning, if any, should be done before times get tough?
I think that you need to be sensitive to earnings and make sure, as much as possible, that most of the earnings stay in the business. Assets, asset coverage, as well as the borrowing formula are also very important. At the end of the day, earnings make the engine go. They are the life blood of the organization. You can survive in tough times even in a low-margin business. But if you can’t generate earnings consistently, you are not going to make it.
What's the most common problem or concern you have experienced during your years of working with small business owners?
Frequently I’ve seen small business owners who really have no one to talk to about their business. This can change as the business grows. But in general, the lack of someone to confide in who is objective and knowledgeable about running a business can be one of the biggest issues an owner can face. Business owners are highly successful, intuitive, and extremely motivated. These are crucial characteristics. But unless they include their business advisors (accountant, lawyer, advisory board, Board of Directors, business consultants), the reality is that they really have no one to talk to. If you look at these professionals as just “service providers,” then you end up looking in the mirror and talking to just yourself. Most small business owners will not confide in their staff when there are business problems.
Any last words of wisdom for the owner that he/she can consider as they are laying awake at night thinking about the business?
In general, whether times are good or bad, whether you are in a small or mid-sized companies, be open to new ideas and be willing to listen to others. You need to listen to your board, your lawyer, and your accountant. You need to listen to your employees. Obviously, you don’t have to do everything they suggest, but you do need to include their input in your knowledge base. Some times your employees have the best ideas because they are closer to the customer, or they are on the ground executing on a regular basis.
I will say that if you don’t feel comfortable talking with members of your board, or your lawyer, or your accountant, you probably have the wrong people. Accountants, lawyers and other business professionals have evolved from service providers to true business partners. The point of having them associated with your company is to benefit from their expertise. Many owners don’t allow themselves to get the full value from these folks, and short change themselves and their company as a result. So here are my words of wisdom in a nut shell: 1. Listen. 2. Seek advice. 3. Make sure you are comfortable with all your advisors. It is not easy to run a business. It’s hard and not all of them make it. The successful ones know that it takes both a great deal of work and a great deal of listening. There is no one book that takes you through it step–by-step, so leveraging the knowledge, ideas, experience, and perspective of others is crucial for success.
