Understanding Your Bank in Times of Uncertainty
In times of volatility, a company CEO must stay ahead of the game, anticipating any and all impacts on financial stability. Factors like shifting customer demand, supply chain disruptions, high interest rates, and inflation, compounded with tightening credit markets, regulatory changes, liquidity crunches, and workforce challenges create a complex business environment. Among these challenges, one of the most critical variables is a lender’s evolving risk appetite.
As the economic landscape continues to shift, so does a bank’s willingness to extend credit. Lenders are adjusting credit-making decisions based on both broad economic conditions and the specific financial health of individual borrowers. What was once a reliable credit line may now come with unexpected requirements, forcing the CEO to rethink financial strategy.
The first sign of trouble often comes subtly, perhaps an email or phone call requesting a meeting to discuss the company’s financials. But make no mistake, this is more than just a check-in. The lender is considering tightening its grip and looking for answers or information. The lender may send a default notice, or it might simply take steps to reduce available credit or demand additional collateral. Suddenly, the lifeline that once fueled production and growth now feels like a noose.
The real danger, however, lies in the fine print of the loan agreement. Hidden within the agreement are the loan covenants. These are the metrics that the lender uses as an early warning signal. The debt-to-EBITDA ratio, debt-to-equity ratio, fixed charge ratio, current ratio, minimum liquidity thresholds, and working capital requirements. A best practice for companies is to track performance against the bank’s covenants, as outlined in the loan agreement, as part of the monthly financial reporting package. This ensures that if the company approaches or breaches a covenant, the CEO is the first to know. Such monitoring serves as an early warning signal, alerting the CEO to potential financial instability and the possibility that the bank may reassess the company’s risk profile, leading to actions to mitigate its perceived risk.
When markets are stable, these conditions may seem like routine financial housekeeping. But when volatility strikes, every decimal point matters. If sales dip unexpectedly, losses begin to accumulate, a key supplier delays delivery, or a key customer delays payment beyond 60 days, the company could find itself breaching a covenant. And that breach could trigger a domino effect—higher borrowing costs, forced renegotiation, or even an immediate demand for repayment.
Liquidity becomes king in these moments. The lender will scrutinize the company’s cash flow like a hawk, watching for signs of strain. A backlog of unpaid invoices? A slowdown in inventory turnover? These could be red flags that prompt the lender to reassess risk, limit access to credit, or tighten payment terms. The CEO must remain two steps ahead, ensuring there is enough cash on hand to weather the storm, even if that means making tough decisions—cutting costs, delaying expansion, or renegotiating supplier agreements.
And then comes the unspoken risk—the loss of lender confidence. This is when the tone of conversations changes, when meetings feel more like interrogations than discussions. The lender is no longer just a financial partner, they are now an overseer, questioning every strategic move, pushing back on capital investments, and demanding more control over business decisions. If trust is lost, refinancing existing debt could become an uphill battle, and the company's ability to operate freely may be severely restricted.
For the CEO, survival means staying proactive, maintaining open lines of communication with the lender, demonstrating financial discipline, and acting in good faith and with transparency. When a lender has lost confidence or is fatigued with a borrower it may be time to source another lender or, if necessary, look for alternative lenders such as asset-based lenders (ABL), factoring, or private lenders with a higher threshold for risk.
In today’s world, the CEO’s greatest challenge is more than managing the company, it’s managing the financial relationships that keep it running. Success is not just about reacting to the lender’s actions, it’s about positioning the company strategically to maintain financial stability and control. By monitoring covenants, maintaining liquidity, and keeping financing options open, the CEO can stay in command of the game.
