Advice for CEOs

In Part 1 of this article I explained the premise that many troubled loans are as much the fault of the lender as the borrower. I discussed how to pursue a conversation with one or more banks about financing for your company. I warned of “the collateral trap” and suggested that your bank should begin by being concerned with the purpose of your loan request and the primary and secondary sources of repayment. Then I noted that the amount and maturity of your loan as well as your operating creditworthiness should be addressed through analysis of your financial statements. If your bank is doing a really good job of understanding your business financing proposal, their analysis should start with the following approach.

When a growing middle market company defaults on a loan, it is common to blame the company’s misrepresentation or its mismanagement of the proceeds from the borrowing. In truth, many loans that go bad are the result of improper structuring by the bank or other lender. Many lenders and borrowers fail to structure financing to fit the company’s operational characteristics. Good banks and good borrowers can assure the quality of the banking relationship as well as the borrower’s ability to repay by having a series of conversations about the company’s credit needs and a loan structure that will serve the requirements of both sides.

Problems with Your Bank?