Is the Sky Falling? What Does Your Banker Think?

 

There is no question that major economic indicators are pointing in the wrong direction and as a result, small to medium-size businesses are facing a number of challenges in maintaining a profitable business, let alone trying to initiate growth plans.

Given that situation, one of the looming challenges that many businesses will face is obtaining or renewing lines of credit with their lender.

Since the start of COVID, federal and state governments have infused massive amounts of capital into the system through forgivable PPP loans and other related programs.

This has helped thousands of companies survive and in fact, in many cases thrive, as they used this new capital to take advantage of increased demand.

 

GRAVY TRAIN PROGRAMS ARE OVER …

However, those programs have now ended, and companies must now deal with multiple economic challenges that could negatively impact their operating results using conventional lines of credit and working capital to fund their businesses.

As these challenges continue to mount, with seemingly no end in sight, it’s important for companies to continually assess their relationship with their lenders.

In order to understand the current mindset of the lending community, we are providing an overview of the second quarter 2022 survey sponsored by Phoenix Management Services that outlines the current lending climate in America.

This survey was published recently and will give us some insight into what lenders are thinking.

 

WHAT ARE LENDERS THINKING NOW?

One of the most significant findings of the survey reveals that when lenders were asked which risk presents the greatest potential to impact the US economy,

SUPPLY CHAIN:  56% believe supply chain distribution problems are the greatest risk. The second biggest risk according to 22% of the respondents, relates to federal reserve policy.

INFLATION:  Another significant concern noted, is rising inflation, as it impacts most if not all of their borrowers. Seventy-two percent of the lenders surveyed expect inflation to continue rising, which will cause further economic stress in the U.S. by forcing consumers to decide which goods and services are no longer worth buying.

OPTIMISM:  Lenders’ optimism in the near-term U.S. economy decreased 10-percentage points from Q1/22. In the current quarter, the majority of lenders (39%) believe the economy will perform at a “C” and “D” level during the next six months.

 

WHERE IS THE GREATEST VOLATILITY?

Lenders were also asked which industries they expected to experience the greatest volatility.

  1. Topping the list with 64% of the lenders, was the belief that manufacturing industries will experience significant volatility, up from 57% the prior quarter.
  2. Forty-four percent of the lenders believe Real Estate and Rental/Leasing will experience significant volatility, which is up from 14% last quarter. This represents a dramatic threefold increase in three months.
  3. Registering third on the list is the Hotel and Foodservice industry, where 39% of lenders believe this industry will experience extreme volatility up from 21% the prior quarter.

And finally, it’s important to note that 71% of lenders expect that loan losses and bankruptcies will increase in the near term. This represents an increase -from the first quarter 2022 as well.

 

GREATER SCRUTINY AHEAD …

The combination of the above views from the lending industry, suggests that lenders will likely be more thoroughly scrutinizing financial reports from companies in their portfolio in an effort to head off potential loan losses.

Given that most lenders expect loan losses to increase in the near term, it is clear that lenders will be doing everything possible to mitigate having to write off bad loans.

This is a strong signal to CEOs and CFOs of all companies to make sure they have open lines of communication with their lenders and proactively discuss their company’s plans, challenges, and action steps to address operating issues that compromise cash flow early enough to mitigate risk to the lenders.

This is especially important if your company is in one of those top three industries that are of significant concern to lenders, as they will be paying particular attention to companies in these segments.

 

PAY CLOSE ATTENTION …

Pay attention to how closely the lender is reviewing your financial information and the type of questions they ask you along the way.

This may give you a clue as to where you stand with your lender, and if you are unsure, it’s important to have them give you feedback regarding any issues or concerns they may be having about your business.

What type of risk do they see in your company? Then, you can proactively let them know what you are doing to mitigate their perceived risk.

Remember, it’s not what you think about the business that’s important, it’s really important for you to understand what your lender thinks.

 

YOU MUST HAVE A …

While proactive communications with your lender are the first step, it’s also extremely important to have a plan B.

Maintaining relationships with a number of commercial and asset-based lenders is really important.

Understanding how other lenders view your business provides a different perspective and creates options to fall back on should your lender decide not to renew your line of credit.

Working proactively with your lender and understanding how they feel about the performance of your company or the industry you are in, may be the difference between having the lending resources you need to effectively manage your business, or scrambling at the last minute to find lending options that may not be the most effective for your business.

Also, don’t be afraid to ask for help along the way, as the future of your business may depend on it.

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.