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Bankers and business owners rarely see eye-to-eye. Recently, my observation of this unfortunate reality caused me to chuckle as I sat with one of my clients and her business banker. What made me laugh was how two extremely accomplished individuals could define the term “special assets” so differently.
Before I explain, I want to paint the whole picture for you.
My client has an incredible business employing more than 90 people. She started with three only seven years ago. And at that time, the bank let her borrow $50,000 after she and her husband signed a personal guarantee secured by the equity in their $140,000 home. That would also be the same home that my client and her husband reside and raise their three children in.
Over the years, this entrepreneur managed to bootstrap the business into a $19 million dollar business. And over those years, the bank stuck by my client, increasing the company line of credit to the multi-million dollar level.
In early 2008, life was incredibly good for this entrepreneur. Her home mortgage was paid off and receiving unsolicited offers to acquire her successful business was a common occurrence.
We all know what happened in late 2008 and like most, this business was hit very hard. Not hard enough to close the doors, however, hard enough to bleed red ink all over their otherwise pristine financial statements.
Even though this banker grew his relationship from a $50,000 signature loan to a $2.5 million dollar line of credit and the company average daily checking account balance exceeded $500,000, he was not happy. And his boss was not either.
I received a phone call from my client requesting me to meet her with the banker and his boss. My client was told that the banker we met with each quarter to review the financial statements was being transferred to another department and in the transition period, the bank wanted his boss to be in charge of the business relationship. I inquired about the boss’s name and title without success. Nonetheless, I joined my client in the meeting with the bank.
It was fourth quarter 2009 and at this point in the great recession, the company suffered four consecutive quarters of losses. Rest assured, the losses were decreasing each quarter. But that didn’t matter.
As we met the boss and he offered us his business card, I glanced at his title. He was a Senior Vice-President.
Normally, we work with bankers who work in the commercial banking department and it is not unusual to meet with a Senior VP when reviewing an increase or renewal of the line of credit request in the multi-million dollar range. So his title did not surprise me. The new banker explained that he has been asked by the bank to review the client’s financial statements and now our relationship with the bank was being moved to his “special assets” department.
As I glanced to my side, I saw my client begin to smile. She was absolutely delighted. Finally, a banker understood how exceptional her business truly was… her company is “special”!
Unfortunately, in the banking world, “special asset” departments are set up to monitor and/or liquidate loans made to troubled companies. A loan (or line of credit) is considered an asset on the bank’s Balance Sheet. Hence, a loan in a troubled company is called a special asset by the bank.
Because the company had posted four consecutive quarters of losses, the bank wanted their money back. And it was this bank Senior Vice President’s job to make that happen. As soon as possible.
The bank Senior Vice President did not mince his words. He explained to my client that the four consecutive quarters of losses forced the business relationship to be moved to the Special Assets Department. This was when my client stated that her definition of a special asset is really simple. She declared “a Special Asset is CASH! Cash is needed to make payroll, pay rent and utilities and make my loan payments! Assets don’t get more special than that!”
So there we were. The special asset banker truly felt my client was in trouble and my client felt that the only special asset she needed to survive the great recession was cash! Their special assets definition couldn’t be further apart.
My client was right. And indeed, her company survived!