A Call From Special Credits
Discovering your account has been assigned to the lender's Special Credits Group (or Special Assets Group / “SAG”) can be a daunting moment for a CEO. It is the equivalent of a fire alarm set off by your lender when they perceive a heightened risk associated with your company's financial health. The situation, while serious, is not always insurmountable as long as thoughtful and strategic measures are taken to effectively navigate through it. Here is a guide outlining the immediate steps to take when the heat rises.
At the outset, it's essential to fully understand the situation. Assess what caused your account to be flagged – was it missed loan payments, covenant breaches, significant financial declines, or some other material change in the business. (Triggers can include income statement losses, cash flow issues, or debt and leverage changes.) You should request a detailed explanation from your lender and thoroughly review your financial statements to identify the underlying issues with your account. It is beneficial to engage with the lender through open and honest communication (many times one of the underlying issues is a perceived lack of solid information flowing to the lender, which is harming their ability to make informed decisions about your business). By scheduling a meeting with your SAG officer, you get the opportunity to discuss their concerns and understand their perspective. Transparency and connection can help rebuild trust and may result in more favorable terms.
Moving to Special Credits requires a CEO to take an objective and critical look at the business; conducting an internal audit is crucial. Start by performing a thorough review of your company’s financial health, analyzing cash flow, profitability, bank covenants miss, debt levels, and overall financial management. Carefully look for any discrepancies or areas that need immediate attention. Apart from the numbers, review your operations to identify inefficiencies. Consider what is necessary to address the waning confidence of the lender, return the business to profitability, and improve cash flow.
Using the information from the internal audit, develop a comprehensive plan for the business moving forward. This plan should include both immediate actions to stabilize financial health and long-term strategies to ensure sustainable growth. Implement cost-cutting measures where necessary, such as reducing discretionary spending, renegotiating terms with suppliers, or possibly downsizing. Take a hard look at revenue channels, customers, and product lines to ensure they are contributing to gross margin, working capital, and positive cash flow. If there are cash flow issues, address the problem by accelerating accounts receivable, negotiating extended terms with suppliers, or liquidating non-essential assets. Cash flow is vital to keep the business running smoothly during this turbulent time and is a metric your lender will be keenly focused on. Once drafted, introduce actionable steps into the strategic plan so that it can be tracked and measured for success.
Your plan should also include a forecast that reflects the changes to the business. The forecast should incorporate the Income Statements, Balance Sheets, Cash Flow, and supporting schedules to model the business activity and reflect the progress in cash flow, profits, and other necessary improvements.
During this process, it’s important to make sure your financial reporting is accurate and timely. As the CEO, you will need, and your lender will want to see that you have a strong grasp of your financial situation and are taking proper measures to address any critical issues. GAAP-compliant financial statements are essential in this situation.
Engaging professional help can provide valuable guidance and support. Consider financial advisors or consultants who specialize in turnaround situations and speak the language that SAG officers are used to using. Our firm, Turning Point Strategic Advisors, is exceptional in developing and implementing a recovery plan for businesses in financial distress and addressing the concerns that Special Credits are focused on. In some cases, you may need legal counsel to navigate complex financial arrangements or renegotiate loan terms. Legal experts can also help you understand your obligations and rights with your lender.
Lastly, don’t lose sight of business fundamentals. Ensure that the measures you take do not compromise the quality of your products or services. Maintaining customer satisfaction and customer loyalty is crucial to keep revenue flowing during challenging times. Look for opportunities to innovate and adapt, which might involve diversifying your product line, exploring growth markets, or leveraging technology to improve efficiency.
Facing financial distress is a critical test of leadership. It requires a balanced approach of stringent financial management and strategic vision. The key to overcoming Special Credits is to be proactive, transparent, and committed to turning around the situation that got you there. By acting deliberately and equipping yourself with the right information while in Special Credits, you can navigate your company through this challenge and emerge stronger as a result.
