Pub. 9 2020 Issue 4

32 Financial Recovery Planning: Don’t Lock Down Your Lending By Patrick Gilbert, BKD S ome financial institutions have been criticized in the past for their reactionary — or “fix-on-failure” — approach to serving the needs of their customers. While certain banks have taken major strides in overcoming this criticism, the perfect storm of regulation, competition, and increasing pressure to be a trusted advisor to the commercial customer still lingers for many. However, looking forward to the post-COVID-19 world, there exists a unique opportunity for lenders — especially those willing to address any historically reactive lending processes related to troubled debt and financial recovery planning. In fact, those who proactively engage customers now to help them see their businesses differently will likely build customer loyalty, avoid potential loan loss and effectively manage ever-changing credit risk dynamics. Here are three proactive business planning steps you can take now to help borrowers not only survive but thrive in the future. 1. Plan With a Curve — No One’s Future Is Flat Over the last few months, enormous pressure has been placed on lenders to ensure a critical flow of capital and maintain cooperation in response to federal economic stimulus. Many commercial customers would not have survived without these measures, highlighting the need for a strong banking relationship. As helpful as these measures have been, they are only intended to deal with immediate liquidity pressure. While customers scrambled to get in line, and banks sought to respond, there has not been much time to think about the problems that lie on the horizon. Yet for each borrower, the impact of COVID-19 and the subsequent recovery brings with it a series of problems that will unfold over set time horizons. These unique “problem horizons” vary for each borrower and may include issues such as covenant violations, customer credit issues, reductions in force or the need to restructure debt. In the past, many lenders have been reactionary in how they’ve addressed these issues. But given the breadth of COVID-19’s impact across industry and supply chains, lenders must help each borrower plan across multiple time horizons. Each problem horizon should be matched with a “planning horizon” that includes critical business planning steps addressing customers, vendors, employees, inventory and financing options. The planning horizon should embed scenario planning capabilities to analyze not only an evolving set of business- specific changes, but also business environment changes. 2. Perform “Bottom-Up” Rather Than “Top-Down” Financial Analysis The challenge most borrowers face is that they have never been forced to rethink how to approach business planning in the way now required. Instead, most borrowers have become accustomed to managing their businesses using top-down, aggregate- level financial analysis, which isn’t discrete and does not provide the same level of flexibility needed to evaluate changing scenarios. In turn, they provide this same broad brushstroke analysis to their lenders and often