January/February 2011

Tell It Like It Is … Communicating With Your Lender in Difficult Times

Regardless of the reason, when your business encounters serious challenges, your world shifts. These shifts occur on multiple fronts. One of the most important shifts is on the communication front, and how you interact with financial stakeholders — in particular your lenders, but also your investors, vendors and even employees.

Effective communication is no substitute for the hard work of digging your company out of a difficult spot, but it becomes a necessary complement to it. More than once, hard work has been undone because of poor communication. Many things fall outside your control during a financial crisis, but you do have absolute control over how you communicate with the people who are important to your survival.

Here is the first hard truth: If your company gets into trouble, you will need to dedicate more effort to communicating effectively. When I share this view with managers in tough situations, they frequently say, “You don’t understand, I don’t have time to talk to all these people. I’m busy fixing my company.”

While management time is at an absolute premium at this moment, the fact is that if you want help from your bank, or investors or employees, you are going to have to share information and explain why it is in their interests to support you through the difficult period.

You can never assume that because your lender has been with you for five, ten or 20 years they will continue to support you indefinitely without a clear understanding of where you are, what you plan to do about it and when you plan to do it.

Many of my examples are drawn from helping companies and lenders find a mutually satisfactory course through a difficult situation. The lessons, however, can be applied to broader constituencies.

The Earlier the Better

Senior management at smart companies begin to develop an effective communication relationship with their lender before they get into trouble. I once complimented a CEO who had worked to develop an effective communication program with his bank. He explained why he had invested the time, saying, “While it may be hurtful, my company could survive the loss of any one of our five largest customers. If my bank shuts off my capital, I don’t know if I would make it.”

Sometimes I hear the complaint that, “My banker doesn’t understand my business.” That’s unfortunate, for sure, but you have a choice to make. You can complain about what your banker does or doesn’t know, or you can make it one of your personal goals to educate him or her, so they know your business. After all, who knows more about the subject than you?

Some CEOs completely delegate the communication responsibility to their CFO. In most circumstances, the CFO will be able to handle most of the communication burden, but CEOs need to avoid delegating this task in its entirety.

A colleague of mine offers the following suggestion for CEOs: Think of your lender, which has given you a $25 million credit line, as equivalent to a customer that pays you $25 million in sales. This puts the importance of the relationship in its proper perspective and suggests to the CEO what their level of involvement in the relationship should be.

One CEO who understands the importance of this relationship, puts a “tickler” on his calendar to ensure that he reaches out to his banker on a quarterly basis.

Just as “nature abhors a vacuum,” people hate an information vacuum. When things go south in your business, you need to increase the frequency of your communication. Some people avoid uncomfortable communication. If their business is faltering and their banker calls, they find an excuse to avoid taking the call. They may be embarrassed. They may believe the problem will right itself quickly. They may believe that for every drop of rain that falls, a flower grows.

This avoidance may be understandable, but it is always wrong, and it is wrong for two reasons: if your lender is concerned and you don’t provide them with the facts of the situation, they will fill the void with what they imagine the case to be. In many cases, their perception may be worse than the reality. Second, dodging unpleasant phone calls is unprofessional behavior, even if the motivation is understandable. You don’t want your lender thinking less of you as a result of your actions, particularly at a time when you need their support more than ever.

An audit partner of one of my clients used to say, “Bad news sells better early.” He was right. People don’t like surprises. One strategy is to include in your update any concerns you see on the horizon. CEOs are frequently concerned they will “spook” their lender and precipitate an action that might be hurtful to the company. To this concern, I have several responses: First, you have some control over how to structure the communication. You can address what you believe the lender’s concerns might be, so they have some confidence that you are on top of the situation. Second, you are not the first borrower to encounter a problem, and your lender may appreciate being brought in early when there is time to address the issue. Third, believe it or not, your banker may have some helpful ideas. Remember, they want you to succeed.

You can seek to enlist their support. Have they encountered a similar issue with another client? Was there something that client did that was helpful? Is there any additional information they might want? Does it make sense to establish a regular communication schedule, like a weekly call?

The other side of the coin is that if you don’t share the information early there is the risk that it will eventually come out. When it does, your lender may think that you deliberately concealed it, in which case you are perceived as either dishonest or incompetent.

In reaching out to the lender in the early stage of some issue, there are a few things to keep in mind. You don’t necessarily have to have all of the answers, but you do have to think about and plan your message. You can tell your lender that you have identified some issue — for example, some softness in new orders — which might cause you to miss next quarter’s sales forecast. You don’t need to have the remedy to the problem, but you should be prepared to offer two important things.

First, you should think through the potential consequences. If the sales miss is as large as you fear it might be, determine if it will cause you a problem with your loan covenants. If you are borrowing through an asset-backed revolver, will lower sales reduce your availability by enough to cause a cash shortfall against your requirements? Do the math for your lender before you reach out so that you can describe the potential impact of the issue.

Second, make sure you have a plan to address the issue. You might need to conduct additional research (e.g., by planning to contact your 20 largest customers to explore their reaction to raising prices). It is also important to share a timetable. As an example, “We are going to reach out to our largest customers and survey them and from this we will update our forecast. We expect this to be done by July 10 and we would like to meet with you the following week to share what we have learned with you.”

Shift your mindset away from worrying about what the lender might do, and instead ask yourself, “What can I do to help my lender understand the issue I’m facing and pursue a plan that helps me and them?” This is a far more productive focus.

While you borrowed money from a large institution, you are still dealing with people. Your focus may be on your concerns or worries, but it is helpful, if not easy, to think about your lender in terms of their needs. After all, your call may have dumped a problem on your banker’s desk. Remember that everyone, including your banker, has a boss. At some point your banker will have to approach their superior with your issue. What have you done to help? What information have you provided so the lender understands your issue and can see clearly how you are addressing it? Are you providing your banker with timely information so they can demonstrate to their superiors that they are proactively addressing the issue?

Remembering your banker has a boss is also important because your problem may exceed your banker’s authority to fix it. They may need to go to their superior or a credit committee. Recognizing this may help ensure that you are doing everything to support your banker in their efforts to support you.

Telling It Like It Is

Lying or omitting important information is never the right thing to do. In times of financial stress, being anything less than candid can be fatal. A senior lender once told me that whenever he catches a borrower telling him something untrue, he immediately concludes that this isn’t the first time. It’s not so much that you lied; it’s that you are a liar. In times of crisis, you are trying to forge a bond of mutual support. That bond will not survive breaches of trust.

I encourage CEOs to think of their communication with their financial stakeholders as one of their company’s products. As CEO you wouldn’t want to send a customer a product that was less than perfect. Take the same approach with communicating financial information. This is another instance where you should not delegate absolutely, even to a trusted CFO. Were I the CEO of a company in distress, I would insist on seeing every piece of paper before it is sent to a financial stakeholder.

There are two principal reasons for this. While it is unlikely that your review is likely to uncover some error in the details, your staff will be on notice that you look at these things and it may prompt them to be even more careful. Additionally, your communication strategy is, or should be, aimed at conveying in this report or memo the message you want to send.

If possible, have someone who is not intimately familiar with the issue read the memo or report to see whether it is understandable on its own. Remember that whatever you send to your lender may get distributed to senior people in the organization who are less familiar with your company and operations. If what you send is hard to follow or leaves too many unanswered questions, credibility will be damaged, even if the information is correct.

In the process of dealing with a challenge, you should always try to build credibility with your lender. One avoidable way to lose credibility is to miss a promised delivery date. If you are uncertain about when you can deliver some item — a forecast, an analysis, etc. — tell the lender you want to discuss the request with those who will be involved in its preparation to make sure it gets delivered on time. If you discover that a promise date may be missed, realistically assess the likely completion date and notify your lender that you have to revise the date and explain why. Again, bad news sells better early.

The focus here may be on communication with lenders, but the principles apply to the broader group of financial stakeholders. When companies face financial stress, their ability to meet payment terms to vendors may be constrained. How is it best to handle this? My advice is to spend some time in the accounting department. Talk with the people who handle vendor calls. Get a realistic assessment of what is possible. Speak with the purchasing people to see how payment schedules will impact delivery. Develop an approach that you believe is deliverable.

Acknowledging to the people manning the phones and fielding the calls from vendors that you know what they do is stressful, is both essential and appreciated. Reinforce that you do not expect them to lie to a vendor at any time. Let them know that if anyone becomes verbally abusive, they are to forward that phone call to you. They need to know that you will not tolerate any abuse of your employees.

Sometimes things outside your control will prevent you from meeting your promises. For example, a significant customer fails to make a promised payment to the company. If you, as a result, are going to miss a promised payment, you need to call your vendors as soon as you know. They are owed an explanation. Under no circumstances should they learn of your missed promise when they go to the mailbox and find your check isn’t there.

Vendors want to get paid on time, just as you do. But my experience is they are usually willing to trade off time for certainty. They may be willing to accept payment in 50 days, but only if it really is 50 days, not 65 or 70.

It is unfortunate, but in times of high stress communication becomes both more important and more difficult. Be aware that there can be a disparity between the message you believe you are sending and the message your borrower actually hears. I was reminded of this fact in a recent engagement. First entering the situation, I learned that the borrower and his banker had met recently. I asked each individual for a summary of their meeting. The lender said that he was worried he had come down too hard on the borrower. He had “lowered the boom,” “read the riot act,” etc. Meanwhile, according to the borrower: “I met with the banker. Things are generally going along OK. He did mention a couple of things that he thought needed some attention, but I’m not sure what they were.” These guys are describing the same meeting.

One remedy to this problem is, as the lender, to be very specific in your assessments, particularly in terms of your expectations. You might observe that: “Eighty-five days of inventory on hand is excessive. It is consuming nearly all of the availability on the credit line.” As such, you might request that the borrower develop a plan by the first of next month that will seek to reduce this number significantly, with specific goals by month showing revised inventory levels and days outstanding.

The importance of communication with lenders and other financial stakeholders grows dramatically as financial difficulty increases. It can be the difference between survival and failure and, as a result, should be a priority of the CEO, not a task delegated to the “number crunchers.” Your lender may be as crucial to your business as any one of your important customers. Ensure that your lender understands your situation and make them a partner in your success.

Jay F. Kilkenny is a managing director with The Finley Group in Charlotte, which is celebrating 25 years of assisting client companies through difficult financial situations. Kilkenny is an experienced turnaround professional providing financial and capital advisory and turnaround management services in diverse industries. His clients have included early stage, middle-market and larger companies, both publicly and privately owned. He has successfully completed engagements, which included turnaround advisory, senior and mezzanine debt financing, the purchase and sale of companies, as buy side and sell side advisor, both within the bankruptcy process (§363) and conventional transactions. He has advised both debtors and creditor groups in Chapter 11 and Chapter 15 proceedings. Before his work as a turnaround specialist, Kilkenny had over 20 years as a senior corporate officer and Big Four management consultant. His operating roles include CEO, president, COO and CFO, in both privately held and public companies, in the manufacturing, power generation, environmental services, entertainment, specialty insurance, packaging and printing industries. He earned an MBA from the Stern School of New York University, an MA from Queens College and a BA from Fordham University.