Most of us are to blame for the recent global economic unpleasantness. We all overindulged and we all borrowed way too much money. But, rather than use our collective mistakes to learn from, the banks are using them to punish us. And, rather than picking on businesses their own size, they’re targeting small businesses, clearly because they’re the most vulnerable. Yes, these are the same small businesses that underpin our economies and give employment to the majority of people on this planet.
During the period of excessive gearing, we all signed up to relatively strict debt terms because: a) we had little choice, b) we had high hopes for the future, and c) these terms still allowed some room for movement. Then, the GFC hit and the usual multiplier effect of diminishing markets kicked in: sales fell, margins fell, earnings fell, free cash flow fell, and, we started to breach covenants. As a result, we all went into panic mode and tried to do everything possible to keep our heads above water.
So, what are you thinking if you’re a bank? How about, “let’s look at our lending book commercially; that is, we’re more likely to get our money back if our customers survive”? Or maybe, “as long as they pay our interest invoices, let’s be reasonable as a sign of good faith for our customers loyalty”? No, what they’re actually thinking is, “this is a perfect time to cash in on all of these breaches by increasing our margins, charging infringement fees and making our terms more burdensome.”
You may be thinking, “what’s wrong with that; they’re a business with shareholders and their customers agreed to these terms”. Well, that’s true, and technically they’re well within their rights to do this, but as I’ve posted ad infinitum, there’s more to business than the immediate bottom line. What this stringency is really doing is creating a GFC aftershock of similar magnitude to the real thing.
Let’s say you’re running a small business. You’re doing absolutely everything you can to survive. Even, laying off workers, taking short cuts and reducing service levels; all pretty risky stuff. Then, you get a letter from your banker (many of them lack the courtesy to call or visit). And, as if you’ve committed some heinous crime, in large letters it mentions the following:
you’ve breached covenants, your margin is doubling, you must pay a fee of $300k for the breach, you now have to report to the bank monthly until they’re satisfied, and, you must engage an accounting firm of the bank’s choice to perform an exploratory investigation of your accounts. Oh…and if you fail to do any of this, the entire facility may be called and you’ll have 14 days to repay the principle.
Do you remember that whole notion of just keeping your head above water? Well, drowning looks like paradise compared to what’s on the horizon. The increase in your interest expense alone is as if you’ve doubled your workforce, but of course the new recruits refuse to do any work. Then of course there’s the fine, which you simply don’t have the spare cash to pay. There’s the half a million dollars (and endless nights) to fund the bank’s criminal investigation. There’s the downtime for most of your crew to deal with the new demands. And, there’s the lost sleep from knowing failure is imminent.
You know, if we were all held at gunpoint and made to choose someone to blame for this whole GFC saga, we’d have to firstly choose ourselves. But, in a very close second place would come the banks. Now, to think they’re instigating this aftershock… well, it just smacks of the same insanity that caused this mess in the first place.
Then again, how many of you have let an investee off the hook come earn-out or equity-ratchet time? (Let’s just pretend I didn’t say that.)