On the heels of the Silicon Valley Bank collapse, there has been increased attention and scrutiny on the banking system. When the banking system gets stressed, banks focus on managing their balance sheets and default risk rather than making new loans. This leads to a pullback on lending and tougher access to credit.
So, what should a private company do in this environment? Here are three ideas:
Communicate more often with your bank.
When credit gets tighter, banks can be less flexible or require higher loan-to-value numbers for new borrowing requests. Most banks want to take good care of their existing customers; however, the bank’s credit committee will more closely scrutinize new loan requests in the current environment.
One way to combat this is to communicate more frequently with your bank and let them know your plans well in advance of any borrowing requests. In doing so, you will solicit feedback from them prior to making a formal request and improve your chances of getting the loan you need.
Pay attention to your loan covenants.
Banks never like surprises. They especially don’t like them at a time when their own balance sheet is under more scrutiny, and covenant breaches will cause them to look more carefully at a borrower’s credit quality. Because of the tightening credit environment, your bank may not have the same flexibility in dealing with covenant breaches as in the past. The remedy: avoid credit breaches altogether. However, if a breach becomes unavoidable, proactively communicate the news to your bank in advance instead of surprising them after the fact.
Pay closer attention to your own receivables and credit standards.
When bank credit gets tight, business activity declines. This situation not only affects your business but all your customers as well. Depending on their financial strength, your customers may be significantly impacted by tightening credit, which may affect their ability to pay you. This means that you have more credit risk in your accounts receivable today than you did a year ago.
It is prudent to do a hard review of all your customer accounts, aging, credit limits, etc. and spend more time on collections and managing your own balance sheet. Business has been good for a long time with interest rates close to zero. That game has changed, and many companies may not have the financial strength to adapt to this new environment. Make sure you manage your own risk by reigning in your accounts receivable and reviewing your credit standards.
A tightening credit environment is a natural part of the economic cycle, but it can be easy to forget about the potential effects on your business after a long period of greater economic certainty. This is a case where the best defense is a good offense. Right now, it’s a good idea to stay in close communication with your bank, notify them ahead of time of any potential bad news, and keep a sharp eye on your own clients and receivables.
If you have any questions or would like to discuss your company’s circumstances, please don’t hesitate to reach out.
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