Business Insolvency and the Banker Relationship
Business insolvency occurs when your firm defaults on its secured debt. When this happens, your secured lender, usually your banker, will swoop in to “rescue” your company by installing his own manager for the firm. You need to avoid business insolvency at all costs if there is even a glimmer of hope that you and your management team can turnaround your firm.
If you are already in default or will be soon, you need to meet with your banker immediately. Typically, your banker will give you a chance to fix the firm yourself, but he needs to believe fully in your plan. In addition, the bank will not usually take control until the value of the firm is about what its loan position is worth. If the value of the company is more that this, then your banker will likely give you some more time.
Here’s what you need to do.
- Do a systematic discovery of the problems facing your company.
- Create a robust company rescue plan.
- Develop a detailed plan for repaying the bank in the next 6 to 12 months. This will likely require stretching trade creditors and selling assets and unprofitable divisions.
- Create conservative financial projections that support’s your firm’s rescue plan.
- Set up a meeting with your banker.
- Review the rescue plan and financial projections with your banker.
- Show your banker your proposed repayment plan.
- Answer any questions and offer to help him or her sell your proposal to bank superiors.
- Hope for the best.
Likely, if you have prepared well, your banker will be able to convince superiors that your plan is reasonable, and they will give you time to carry out your plan. If not, you may find yourself out of a job. But, that would have happened anyway if you had not followed this approach, so you did not lose anything by going to your banker first. To get a feeling for your success rate, your odds of a successful outcome is about 4 in 5 by following this approach.
Guidelines for banker meetings is in Lesson 9 of Dan Betts’s training course and handbook. Although Mr. Betts wrote this for American banking relationships, the overall procedures are valid for countries with the UK style insolvency. In addition, Mr. Betts does a good job explaining how to create and carry out a business rescue plan. Click business insolvency course to get more information about this.
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