By: Prince Varma
Good day all. My last blog revolved around practical approaches to effective client relationship management. It time to get back to a “risk” type conversation.
I recently told my wife that if I hear the phrase “…in this economic environment …” uttered as a caveat one more time, I’m going to scream. I have truly come to anticipate the beginning or introduction to interviews and articles to lead in with this sentiment and it’s driving me nuts.
In these economic times (you can tell I’m from the sales side, I cleverly changed the phrase), it is clearly not business as usual within most financial institutions. Conversations with CEOs and bank presidents over the past two months have usually followed the same theme, “I’ve got money to lend, but I just can’t find a decent deal” or “I’ve got applications up the wazoo, but the quality just isn’t there.”
So, what is going on?
The obvious answer is that we are looking at applications more closely and the credit side (risk management guys) is deliriously happy because everytime they make a recommendation about “reviewing the opportunity further” they also don’t hesitate to mention, “in this economic environment.”
Really, what is the scoop and how do we adjust on the front line?
Clearly, we know that deeper reviews and management of risk is being undertaken. The problem is that the established standards are no longer valid. Yes, the basics ratios still need to be run, but let’s face it, in this economic environment a company’s historical performance is no longer an effective indicator as to their future performance. The playing field is no longer consistent. The past two to three years of financials are based on circumstances that no longer apply. This means that the analysts are having a difficult time establishing effective benchmarks from which to apply credit policy – and we know that those guys are the paragons of adaptability.
We are being asked to evaluate risk in an uncertain circumstance. We are looking at projected revenues and earnings and examining receivables. We are also comparing this business to others in the industry, determining which other market segments have a direct (and indirect) impact on the performance of this one, reviewing business plans and evaluating management depth and experience. And, at the end of the day, either saying no, saying yes but not so much or holding our breath and hoping that divine intervention shows us the way.
Does any of this should sound familiar to you?
It should. We see these type of deals all of the time and we call them the start-ups.
Ok, so what am I recommending? Quite simply, that we take a step back from our typical approach to the established business and engage with them the way we would a start-up.
When an opportunity or request presents itself, restrain the urge to go down the garden path. Slow down! No… stop! Take a deep breath, put on your “economic development hat ” and approach the deal the way you would if it were a start-up (and I don’t mean running away at top speed in the opposite direction screaming). You should:
- look for or help them construct a short term (next four to six month) tactical action/priority plan;
- help them or review their 12-month business plan;
o NOTE: If the business hasn’t realized that they need a short-term survival plan and a mid-term business plan… run! Run far and run fast! - examine their market and have them explain why they will make it versus the competition;
- dig into their management expertise (think AIG);
- have them explain how their tactical and 12-month business plan will keep the doors open and the lights on (since its coming into summer we’ll cut them some slack on the heat); and finally
- review and revise their projections.
If at the end of this, you still feel that the deal has legs, it probably does, and you’ve done a pretty thorough job building the business case for the credit side.
Or, you could just lament that there really isn’t much out there in this economic environment.