DEALING WITH YOUR BANK AND LOAN DEFAULTS
Choosing a bank is not just to compare facilities and products, it is about choosing the right partner. Only few businesses operate without sourcing for banking finance. Business owners must ensure that they maximize the banking relationship throughout all the phases of their business cycle. Although it is very important for business owners to educate themselves on how well they can best manage their finances in the business, but they must also not overlook understanding how to work well with financial institutions (banks) which is very relevant for any business owner. This aids the banks in understanding the business and will also enable them provide support and advice when needed
The relationship between the bank and a business owner is one of the most vital and long term business. This is because it includes certain provisions for the business owner such as source of funding, professional advice, relevant networking and other services that come along with it
Business owners should treat their banks as strategic partners and they must also ensure that they adopt certain tips in order to maintain a good and positive relationship with their banks. These include:
- COMMUNICATE FREQUENTLY
There should be a routine for regular meetings with the banks, the one where both the bank and the business owner objectives will be achieved. Business owners must be clear on the objectives of such meeting, the relevant information to be shared and the ensuring that up to date information on what is going on in the business are shared with the lender. Effective communication between the bank and the business owner will lead to a good relationship between both parties
- CREATE A MUTUALLY BENEFICIAL RELATIONSHIP
Banks are also in business in order to earn returns from their clients. Bank provides a source of funding to various business in order to ensure its rapid growth than without the provision of funding made by bank. When a bank feels good about a relationship with a business, they are more likely to manage through a tough situation. Rewarding your bank with ancillary business (cash management, deposits, credit cards, etc.) when they support your business with capital funding is important. A mutually beneficial relationship will foster the relationship between the business owner and the bank since they are benefitting from each other activities
- READ AND UNDERSTAND THE LOAN AGREEMENT
Business owners must also ensure that they read, follow through and adhere to the conditions that are stipulated in a loan agreement. As the borrower, you are signing the loan agreement so you are agreeing to stay in compliance with all the terms included. It is best to designate someone or a party that will be in charge of monitoring and ensuring compliance with the loan agreement. In addition to this, companies should also be thinking about the next four quarters. Especially questions relating to – will I be in compliance based on my projected performance? , are there limitations on acquisitions or capital expenditures or distributions?. Knowing these limitations and seeking approval from the bank in advance is critical to maintaining a long-term relationship.
- CALL YOUR LENDER AT LEAST ONCE A QUARTER
Business owners must ensure that they keep positive relationship with their banks by calling them at least once in a quarter to give share the positive business news and also update the lender in any change whatsoever in the business projections. This will also foster the relationship more with the lender
- MAKE REFERRALS TO OTHERS
If the relationship between your bank and your business has aided your businesses in many ways. Business owners can recommend the banks to other clients or businesses that they normally deal with by making a referral and putting in a good description of how the bank has helped in the business. Your bank will be grateful and this will also blossom your relationship with the bank. This will also push them to make sure that you are having the best experience possible at their bank
- ENSURE THAT ACCURATE INFORMATION ARE PROVIDED
They must also ensure that all relevant information pertaining to the business are shared with the bank. Business owners must also ensure that they provide certain and specific documents such as the business plan, income statement (Profit & Loss account), balance sheet, and account receivables and payables report quarterly or annually. Business owners must carefully read and review before sending any information to their banks and also provide explanation to any unfavourable item in the information sent to the bank.
- SHARE (SOME) BAD NEWS
One stumbling block is the tendency to establish regular communications with your banker when times are good and then run for cover when there is any negative variance to plan. Hard times are precisely when you should increase contact with your bank.
Business owners must also ensure that if there is any bad news or turmoil related to the business, they shouldn’t hesitate in sharing the news to their banks. The banks should not get the information second hand as this shatters the trust between the business owner and the bank. They must always proactively share the bad news to the bank by contacting them and explaining why such has happened and the impact on your business, measures that will be taken to fix the problem. By doing all these, business owners are giving their banks the opportunity to be a part of their solution
- ROUTINELY INVITE YOUR LOAN OFFICER OR BANK REPRESENTATIVE
Another way of maintaining a good relationship between a business and the bank is by routinely inviting them to check how the business is faring. This enables transparency and builds the trust more between both parties. Representatives from the bank can visit the business quarterly or bi annually to foster the relations between both parties
- BUILD TRUST
There should be a focus on building your bank to one your best advocates. Building trust happens as a result of effective communication between both parties. This can also be achieved by being open with your bank, being transparent will the information shared and also having open and candid discussions about your business. It will be beneficial to both parties in the long run of the business
- BUILD A SUCCESSION PLAN
Building a succession plan that can be shared the bank is another good way of maintaining a positive relationship between both parties. Business owners must ensure that the bank representatives meets the team and every other relevant person in the business. The last thing a bank want is a business solely dependent on one person running it without continuity. There must be an evidence of continuity in the business for the bank to keep their trust in them on the long run
A loan default can be defined as the failure to meet the financial obligations indicated in the loan agreement that is signed by the business owner and the bank who is the lender. Often, a loan default translates into the business owner’s inability to pay their debts on time which was stipulated in the agreement. Due to the differences in each loan agreement, default penalties vary. However, the effects of defaulting on the loan will lead to both immediate repercussions and future implications for both the business owner and his or her business.
When a loan default occurs, it is sent to a debt collection agency whose job is to contact the borrower and receive the unpaid funds. Business owners must ensure that when borrowing a loan from the bank, they follow all the conditions stated in the loan agreement. Failure to adhere to the loan agreement leads to a severed and damaged relationship with the bank and it will also affect accessibility to receive future credit from the bank and other financial institutions
A business owner can deal with a loan default payment by taking the following steps:
- INFORMING THE BANK
This should be taken with upmost relevance because information is key during situations like this. Business owners must ensure that if they can’t make payments on time, it’s important for them to contact their lender or loan servicer to discuss issues relating to restructuring the loan terms and agreements that will enable the business owner to pay when they deem it fit. They must also keep in contact and stay open about your financial situation. This may make your lender more amicable to repayment plans or debt settlements. This should be done as soon as possible, the bank cannot help you if you don’t communicate with them. When the business owner contacts the lender,
- They could work together to adjust the borrowing arrangements and repayments schedule to find a plan that that suits the budget of the business owner
- They could discuss the business and give advice on how best they can improve their cash flow and profits
- REFINANCE YOUR BUSINESS LOAN
Although this is not the right thing to do and should only be adopted when there is an expected future inflow of cash flow or profits. The business owner can apply for a business loan and use the funds received to pay the previous debt. This means the business is liable to repay back the loan to the new lender
If the business owner already have a loan with good terms, then it’s possible that you simply won’t be able to find a refinancing option that’s better than what you have.
- CUT COSTS
In the case where a business is facing a loan default, it must ensure that it cut costs and reduce every unnecessary spending to a minimal point. The business must ensure that they prioritize all the necessary expenses in order to make some funds available. This is enable the business to settle it loan payment gradually
- SOURCE OUT PAYMENT SOLUTIONS
After contacting the lender, business owners must prioritize the payment of such loans. They must find ways of paying back the banks immediately in order to maintain the trust between both parties. There are several ways a business can adopt in order for it to pay back its loan debt, such ways include sale of fixed assets of the business, cutting down some top officials salaries etc.
- UNDERSTAND THE LOAN AGREEMENT FULLY
Business owners must fully grasp the conditions laid out in the loan agreement between both parties. This consists of the consequences that a business will face when they default in payment of such transaction.
- GET THE HELP OF AN ATTORNEY OR A PROFESSIONAL CONSULTANT
If a business can’t find any other way out of defaulting on its loans, the business owner might want to seek out legal assistance or the help of a consultant. A lawyer can help you understand what rights you have in your specific situation and a consultant will also give professional advice on the possible best way the business can adopt in order to come out of the situation.
In conclusion, the most successful businesses understand that maintaining good relationships with their lenders is a wise business strategy. Although building a relationship takes time and hard work from both parties. Defaulting in loan payments to the bank will severely damage the relationship that has been for years. Business owners must ensure that they avoid this at all means. If a business is struggling to pay its loans, the worst thing it can do is to sit and do nothing. Business owners must also keep in mind that a loan default is a lose-lose situation for both parties, so it is a must to communicate with them before the default process begins.
About the author
Onamakinde Dare Daniel is a highly motivated accountant with knowledge in Accounting, Taxation, Management, Audit, Costing and Research. He is keen on tax matters due to its ever dynamic nature.