A recent discussion in the LinkedIn group, Restructuring and Turnaround Management, asked whether anyone in the turnaround industry ever received solid referrals from the banks.
Although the majority were responding from the USA, it seems there is little difference between the two sides of the “pond” when it comes to the banks.
The general consensus was that most lenders were either not interested in considering the options for rescue and turnaround for struggling clients or preferred instead to “manage” loans themselves until it is too late, when they call in the insolvency practitioners.
This comment from Al Jones in the US was typical of what he saw as the banks’ view: “we can handle this, maybe it’ll fix itself especially if we bluster and threaten the borrower, or it’s unsalvageable.”
But the question is how can a bank’s staff with no direct experience in small business or business turnarounds make such an assumption?
UK-based Andrew Strachan, pointed out that an inevitable consequence of this attitude was that while interest rates remained low the banks continued to prop up zombie businesses rather than risk losses, thus diverting resources away from healthy, growing companies with a real need for investment.
At K2 Business Rescue we too have seen very few referrals from banks in our 22 years as a firm specialising in turnaround. We understand that there are good reasons why banks do not initiate a turnaround or recommend one to their clients. They mainly relate to fear, fear that it may result in financial risk to the bank or damage to its reputation. This fear is valid in a world that wants to blame and possibly sue someone. And who could blame them if it goes wrong? Creditors who aren’t paid, employees who lose their jobs, or they may attract some bad press. A big risk.
A further reason for a lack of engagement in turnaround is the view that banks no longer behave as long-term partners with a client. The bank-client relationship has become more transactional. This works both ways, why should a bank invest further time or money in a client who might take their business away after the business has recovered?
Business rescue and turnaround focuses on survival whereas all too often the insolvency practitioner makes more in fees out of a formal insolvency procedure. The banks understandably use their trusted (panel firm) insolvency practitioners to do reviews on their behalf but the system is flawed if the insolvency practitioner’s interest lies in a formal insolvency appointment. The banks know this and so the number of business reviews has declined, but it has not yet been replaced with an alternative that focuses on rescue and turnaround.
…..Or perhaps we in the turnaround profession need to get our message across more loudly and clearly?