“Should I be worried about my bank?”

Understanding Banks

Banks are generally willing to help companies in financial difficulty, but their primary concern, in order of priority, is:
1. their loan/ overdraft is secured;
2. that interest is paid on time;
3. that loan principle is being repaid as agreed or plans for its repayment will be met on time.

So these are their primary considerations when advancing any funds to a business and they are constantly reviewed if it is in difficulty. They will normally lend money against a the company’s own assets by taking a fixed charge or a debenture (a fixed and floating charge) but they sometimes ask for personal guarantees and collateral security from the directors or shareholders if the company doesn’t have sufficient assets to pledge.

When a business is in financial difficulties a bank might be willing to advance new or further funds if the security is available and if it believes in the directors and the business which normally requires a plan. However, if the bank is already exposed with existing loans and overdrafts and it is concerned about security, which may have reduced, it will be looking to either increase security or reduce exposure by withdrawing loans or overdrafts facilities.

When a bank loan is exposed it is normal for the bank to charge additional management and monitoring fees and to provide for the exposure on its own balance sheet and pass on the impairment charges to the company for the cost of treating it as a bad debt.

Feel free to call K2 for help dealing with your bank or read some of our literature in the Resources section

“How do I restructure my existing loans?”

Restructuring Overdrafts and Loans

You may have existing overdraft facilities and have taken out loans in good times with payment plans that you expected to meet. Restructuring these can improve the cash flow by extending the existing loan period to reduce payments. However, more likely is the need for restructuring existing facilities because your bank is putting you under pressure to reduce its exposure or even threatening to demand its repayment.

In extreme cases loans can be converted to equity, referred to as debt for equity swaps, but this is normally only done with very large companies or private loans.

Banks dislike overdrafts because they tend to operated at the maximum facility and must be monitored closely which involves significant bank management time. Banks like to avoid the time-consuming arguments with companies over additional monitoring fees and impairment charges by converting an overdraft to a term loan as part of any restructuring.

Negotiating terms as part of a loan restructuring can be difficult as there are many variables and the bank’s objectives are often not clear. One issue is their focus on improving security when all or some of their debt should be treated as an unsecured. Another might be their demand for aggressive debt reduction when they have a debenture such that directors need to understand the consequences of failing to meet their demands. Indeed understanding banks and the relative power between you and them during negotiations is critical as you may have a much stronger hand than you thought.

Talk to us if you want help with a restructuring plan and renegotiating facilities

“How can I raise more funds to survive and grow?”

Funding Options for Survival

Broadly speaking most new funding for companies in financial difficulties is provided against security, whether company assets or collateral which means pledging personal assets. The most common asset offered is its book debts, for example by factoring or invoice discounting.

Asset based funding

However any asset owned by the company should be considered as a possible source of finance as there are lots of specialist lenders who will consider either lending against a fixed charge or buying under a sale and leaseback agreement. Such assets to consider as sources of funds should include:

  • property or land
  • receivables – book and other debts that are due
  • plant and machinery
  • vehicles
  • other equipment
  • stock
  • agreements that provide a guaranteed future income

Equity based funding

In addition to borrowing against assets there are a very small number of turnaround equity investors who provide top-up funding, financed above the security available. This unsecured funding is expensive and normally involves handing over control to the investors.

Working capital funding

In spite of the above, we believe that the best form of funding for companies in financial difficulties is to think and act like an entrepreneur, to be creative and provide leadership, to lay the foundations for future growth without overtrading by avoiding the need for ever more working capital.

Working capital funding is the efficient business practice of cash management and partnering. Cash management involves the pre-payment or early payment by customers against a discount, and also managing suppliers to agree extended credit or deferred payment terms. Partnering involves minimising the need for cash to fulfil orders by collaborating with third parties to share risk, share work and reduce payment obligations. Partnering may involve all or any customers, suppliers, staff and sub-contractors.

Feel free to call K2 as we have a lot of experience sourcing funds for survival

“Why does the bank want to change my arrangements?”

Withdrawal of Bank Facilities

Banks sometimes make demands on loans and withdraw facilities when they have lost confidence in the company or its management.

While it is normal for them to have had extensive dialogue prior to withdrawal of facilities, they sometimes do this if they feel that management is not talking to them. Either way, management needs to engage with the bank and if unable to repay the money demanded they ought to seek assistance because confidence has been breached.

The bank may be a secured or unsecured creditor with its associated rights that will need to be recognised in a restructuring if they cannot be repaid. However more critical is normally the need for a bank facility without which operating a business can be very difficult.

Banks are often very wary of opening a new account with a company that has fallen out with its former bank before even considering new facilities in such a situation. Credibility is key and generally needs new management or at least advisers who can deal with the bank.

If your account has been frozen, call K2 now for help