18 June, 2009

Bank on your back? Act like a receiver

I’ve had this conversation often, including with myself on a couple of occasions. Most businesses go through a major crisis occasionally. You just don’t hear about most of them unless they prove fatal. However, in this current environment, many business are financially stretched. The banks are being very tough on anyone in breach of their bank covenants (key financial targets which have to be met or the bank can call in its loan).

Assuming your business is salvageable, the best way to keep the bank from sending in the receivers is to be tougher than they would be. By that I mean that you should think like a receiver - drastically chopping expenditure, cutting staff, closing branches, taking a large axe to management, killing off non-profitable products and services, and so on. Not half-hearted measures, but really tough-minded ones. If you’ve got a plan that the bank can easily see is tougher than what they’d do, you’ve got a chance of staying in control - providing you actually do what you said you’d do. And you’ve got a better chance of preserving some strategic capability for the future (like key designers or young trainees). Once you do get the bank off your back, you can get on with the job of building your business, even if it is from a smaller base.

Of course, it’s even better if you get tough a lot sooner in the crisis, long before the bank gets heavy-handed. That way there’s a small chance that they’ll leave you alone and not impose all those reporting requirements, penalty interest rates and outrageous investigation fees which make the job of recovery even harder. A small chance.

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