Enjoy complimentary shipping and easy returns on all USA and AU orders

The Arcis Man

How to deal with banks if your business is underperforming

11 October 2019

If your business has underperformed then you may find yourself dealing with a high-risk division of your bank. Every bank has a unique name for its “insolvency” division that disguises the purpose of its existence but make no mistake, this is the bank’s arm that will enforce its security if it isn’t happy with its position.

So a common question is how do you navigate in this environment?

Bank concerns

Just like when you apply for a loan, the bank will make two initial assessments of its exposure to your business:

  1. Firstly, it will want to know how you propose to repay the amounts that you owe to the bank. This needs to be based on the forecast cash flow of your business.

  2. Secondly, it will want to understand whether the value and liquidity of its security is sufficient to cover its exposure. This will be based on fresh valuations of assets that are used to secure the bank’s facilities and the business’ balance sheet.

One of the main difficulties that arise in this situation is that the borrower usually has difficulty providing this information to the bank in sufficient detail and without being too optimistic about the business’ future. What follows is an aggravation of stress on both sides that puts the business at an even higher risk of failing.

What needs to be communicated to the bank?

Drip feeding bad news to the bank will destroy your credibility. If your forecasts indicate that you need flexibility or additional funding then you need to be upfront with your bank and be able to:

  1. Quantify the range of financial impacts of the problems and reforecast the short term profit and cash flow;

  2. Consider the banking covenants that are in your loan facilities and whether you will be able to comply with these;

  3. Allow for a margin of error in the forecasts (things never turn out as you expect);

  4. Make sure your financial model is working as you think it is. Now is not the time for mistakes.

If you don’t have a three-way financial model (profit and loss, cash flow and balance sheet) that is capable of producing this information, then you need help. Don’t delay engaging a professional accountant to prepare this for you as if the bank doesn’t get comfort quickly, it is likely to engage its professional to prepare the information (and you’ll pay their bill). In most situations, this will be a qualified insolvency practitioner.

Key messages to communicate

While there may be many issues to address with the bank, there are some simple messages that must be conveyed:

  1. Describe the problem, its cause and its potential impact on results;

  2. Explain the action taken to address the problem and avoid a reoccurrence;

  3. Confirm whether the business has sufficient cash available to continue operations and service debt. If you don’t have enough cash to get through, then you have a much bigger problem.

Asking the bank for more money

When your business is tracking well, you’ll likely find that obtaining debt is easy. Don’t compare this with trying to get additional funding when your business is in any form of difficulty.

If you need to ask your bank for funding in difficult circumstances, then there are some key things to consider:

  1. Banks don’t like funding tax problems. If you have accumulated tax debt, your bank is unlikely to be willing to lend you funds to pay it;

  2. If there is a good reason for the bank to provide emergency funding, you will need to demonstrate that you have done everything you can to fund the problem from elsewhere and that the amount you’re requesting is just enough to get by. Don’t ask for more than you need.

  3. Banks don’t like to provide funding to pay unsecured creditors. When businesses trade with each other they take credit risk just like the bank does when it loaned funds to your business. The difference is that the bank usually takes security so that it gets paid ahead of other creditors if things get messy. Asking your bank to fund you to pay your unsecured creditors is reversing this equation.

  4. You will need to understand the bank’s existing security position so that you can structure your request in a way that maximises the bank’s ability to be repaid;

  5. You’ll also need to have a realistic plan to repay the additional funding as well as the existing facilities.

Our message

Business owners need to be careful if their business is in difficulty. If you are having any difficulty dealing with your bank you should quickly get the right professional advice to help you.

You may also like...

Instagram post 2279028231498590252_12522535744 The Arcis Journal is your tool to turn your goals into reality by breaking them down into small actionable tasks over a 12-week period.  Committing to them in pen is the first step to committing to them in person.
Instagram post 2275921308419009054_12522535744 Juan is born out of a highly polished black resin case which has then been overlayed by a rose gold influenced cog based design that represents the wheels of industry. A timepiece of this stature has a strong, weighted feel for the man making his mark.
Instagram post 2273964325738512512_12522535744 Is this do-it from home fitness app going to make me look like Thor?! 😱  Our team put ‘Centr’ to the test, see what they had to say in our latest article. 🖤  Link in our bio ✌️ #fitness #workout #wellness
Instagram post 2268843068340761832_12522535744 Have you watched our latest video on IGTV? 🖤
Instagram post 2267422048027192928_12522535744 Stay tuned! Our YouTube channel is now live, please show us some love and subscribe! 🖤  The link is in our bio!
Instagram post 2250567948404978709_12522535744 Crashing through a forcefield requires momentum. 
Start now with the Arcis Journal & 12 Week Planner.  #pursueyourownlegend
Instagram post 2247695313702585486_12522535744 The ultimate travel companion.  Weekend away or short business trip, the Arcis travel bag is yours in either brown or black full grain leather.  #pursueyourownlegend
Instagram post 2246329728506856220_12522535744 Business ready.  The tools to help you make your mark no matter the occasion.  #pursueyourownlegend
Instagram post 2238545590211194361_12522535744 One of the world’s most famous cave dining concepts, Grotto Palazzese, Italy, gives you the rare opportunity to dine in an atmospheric cave inlet on Puglia’s dramatic coastline. Who would you take here for a Valentine’s date to remember? 🖤 #arcismen
Instagram post 2237034020956209326_12522535744 It’s all in the details🖤 
#arcismen #pursueyourownlegend
Instagram post 2236299066270017435_12522535744 Our next must do Valentine’s Day restaurant – London’s @clos_maggiore 
Voted the world’s most romantic restaurant it is immediately recognisable by their white cherry blossom covered celling and gorgeous open logo fireplace.
Instagram post 2235390195514868578_12522535744 This month’s goals laid out. Time to go get em  Shop the collection now.  #Arcismen #pursueyourownlegend
Instagram post 2232673890122629668_12522535744 What does a timepiece say about a man? 
It reveals the innermost mystery of a man. His style, his character, his ambition, his fears. 
What will your timepiece say about you? 
Explore our range of Swiss Made timepieces, each created to tell a different story.  The Valentine’s Day Gift that says so much.