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The current approach of banks to SME workouts

The current approach of banks to SME workouts

In the context of banking history, “workout” areas are a relatively new phenomenon. In the early 1990s, many of the major banks around the world started to take a different approach to customers that had fallen on hard times. Rather than simply asking them to find another bank and giving them an exit date, they established specialised lending units or asset management departments to work with the customer. Usually the ultimate goal was to achieve a managed exit that would preserve the business or a reduction in the customer’s indebtedness to a level where the bank would be more comfortable.

So when the question is asked, "are the banks flexible when SMEs are transferred to their respective workout areas?"  The answer is yes.

At FactorONE we are finding that the majority of bank workout areas will work collaboratively with SME directors / owners and non-bank lenders to find a mutually beneficial solution if a business finds itself facing financial difficulties and trading challenges. The key for SMEs is to be totally transparent when they find themselves dealing with such areas. It is often a shock that their business is now considered to be ‘non-performing’ and requires some form of funding restructure.  Owners who choose to run the other way and ignore bank requests to deal with any perceived funding issues will often result in limited options being available in the future to restructure or refinance. Following the GFC, the banks adopted a more flexible approach to dealing with increased portfolios of impaired or non-performing SME loans. Clearly the banks have been prepared to consider ‘informal’ restructures of facilities which incorporate a debt reduction component.

In the instances of invoice finance debts, particularly, we have found that the banks are often amenable to releasing the debtors from its GSA. This allows a business to continue funding crucial working capital and trade cycle cash flow needs with a non-bank cash flow lender, such as FactorONE. Our recent experience is that banks prefer to allow directors sufficient time to arrange a refinance of core working capital debts, as opposed to appointing a receiver and risking the possibility of crystallising a loss.

Ironically, any remaining secured-term debts often demonstrate improved serviceability; once an invoice finance solution has been provided and the cash flow issues have been rectified. In summary, FactorONE has good relationships with the workout areas of the Banks to ensure SMEs that need to find a new funder can work through a sensible solution which benefits all parties. This also ensures that the banks’ bad debts continue to be minimised and reputations remain intact. 

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