You and your bank: in the world of banking, loyalty is no longer the name of the game.

According to banking lore, Albert Einstein is known to have stated that the greatest mathematical discovery of all time is compound interest. Far from begrudging lenders a fair return on their loans in time of economic adversity (recession/stagnant growth), lenders to small to mid-sized family-owned businesses have increasingly traded in long-term customer banking loyalty in favor of declaring loan covenant defaults and abruptly transferring the loan to the lender's Loan Workout Group and/or insisting that the borrower move the relationship to another lending institution, often within short notice (30 - 60 days).

What is behind this banking metamorphosis that no longer rewards historical customer loyalty in favor of a quicker fix by the lender to eliminate the bank's potentially classified loans vs. a longerterm, financial restructuring by the customer?

Financial deregulation: Accelerated in the '80s and '90s, this has contributed greatly to banking consolidation, significantly reducing the number of commercial banks focusing on lending to small and medium-sized businesses. The same consolidation phenomenon in banking has also occurred with asset-based lenders, making it increasingly difficult to find replacement financing for loans in the $500,000 - $2 million range, especially when the term loan portion of the banking facility is greater than the working capital (shortterm) line of credit. Combined with the impact of the still recent economic downturn and substantial loan losses, and the lingering economy still in need of a jumpstart, lenders have tightened lending parameters and policies for approving/renewing business loans on a more national scale to cushion market and industry turbulences, often leaving minimal wiggle room for the creative lender to help mend the customer's business wounds.

Draconian cost cutting: This has accelerated to offset the impact of loan losses, reducing the pool of experienced lenders within a banking institution, often resorting to "credit scoring" as a lower-cost method to approve loans vs. the incorrect assumption that lenders have become simply lazy. There has been a tremendous overreliance placed on credit bureau reports (Equifax, TransUnion, Experian) on the strength of the guarantor(s), typically the entrepreneurial owner's credit history and Personal Financial Statement with nil or minimal credit analysis done on the business itself. Typically, this credit analysis would include the company's historical track record, pro forma projections, cash budget and turnaround strategy as key analytical tools for the credit officer. Bankers in economic downturns have become suspicious of pro forma projections. Credit scoring takes these factors and analytical tools out of the lender's decision-making ability to assist the longer-term process of restructuring the business to return to profitability.

Tripping of loan covenants and/or missed debt repayment, collapsing collateral values resulting in an over-advanced loan facility: When this happens, often the loan is quickly transferred to the bank's Loan Workout Group as the most expedient manner of exiting the borrowing relationship and reducing the bank's classified assets. A new account officer from the bank is typically assigned and no longer is the borrower's prior long-term banking loyalty rewarded by having previously kept good deposit balances when economic conditions were rosier. Today's machinery and equipment (M&E) market is easily worth 30-40 percent less than just 18 months ago, potentially making a prior collateralized term loan "upside down" in terms of loan to value. A bank which may have been lending at 50 percent of "eligible" inventories may unexpectedly determine that inventories which may be slower moving should only have a formula borrowing base at 30 percent and the company is forced to pay down on its line of credit, often by deferring much needed maintenance repairs or worse, missing payroll tax payments in the hope that the economic bloom on the horizon is just around the corner.

Upshot: All the above factors have resulted in an overall effective drying up of the creative gene pool of opportunistic lenders vs. risk adverse lenders.

So what's a borrower to do?

These recommendations, from a consultant's point of view, are not tantamount to the discovery of penicillin to combat your ailments, but will provide strategies for combating your company's present illness to find a replacement lender when warranted.

1. Understand that banks deal with a commodity: Availability of money with different lending parameters. Just because your existing commercial banker no longer believes in your company, this does not close the door to more opportunistic, creative lenders from other banks expanding their loan portfolio. Alternative lenders to commercial banks specialize in different types of lending. For example, asset-based lenders are more focused on collateral values vs. high leverage (debt-to-equity or debt-to-tangible net worth) exhibited by the borrower. Other lenders will focus more on commercial real estate as they feel more comfortable with "location, location, location" and property is less inclined to walk away vs. bulldozers or other machinery pledged as collateral. Factors specialize in discounting receivables but generally shy away from inventory loans. Equipment finance companies specialize in term lending based on M&E appraised forced sale values and can supplement the line of credit offered from a separate financing institution. All of these lending sources generally come with a higher price tag attached.

2. Be more concerned over sufficient credit availability rather than the pricing that will be more costly than your traditional bank lender as the perceived degree of financing risk most certainly will have been increased. But, determine the increased pricing cost relative to your new ability to take supplier discounts, retain key single source vendors vs. promising the proverbial "check in the mail," and costly loan documentation typically seen in lender Forbearance Agreement fees, and for the business owner to focus on business strategies with action steps to return your company to profitability.

3. Understand from the outset the significance of loan size in approaching a new replacement lender. For larger institutions, loan size is often in the minimum range of $5 million - $10 million for reasons of economy of scale. You must realistically fit your borrowing requirements with the lending institution to be approached and determine early if they can do one-stop financing to include accounts receivable, inventories, machinery and equipment and real estate, or if they avoid certain types of borrowing-based collateral loans. Often a lender will restrict the term loan portion to 25-50 percent of the total borrowing facility, thereby causing the existing borrower to potentially stay in the borrowing structure on a reduced basis.

4. Discuss with the potential replacement lender if a reduction in overall pricing can be negotiated downwards. This can be done after meeting certain benchmark performance measures (per pro forma projections provided to the lender, which can provide an incentive for the entrepreneur to be realistic in submitting projections). Understand the lender's exit fee arrangement can range from 3-4 percent of the total loan commitment if the borrower leaves within 1-2 years from exiting the loan, to zero percent upon 60 days advance notification. This can save you a bundle later on when your company is financially healthy and again romanced by commercial bank business development officers.

5. Research who the creditable replacement lenders are, and their lending philosophy prior to executing loan documentation. Preoccupied business owners naturally would rather focus on their business operations than deal with new lenders whom they may now potentially distrust. A client once characterized the process akin to being in a dark room, fumbling to find the light switch. While your existing lender may be threatening liquidation or the sale of your company's assets to repay the bank, you are nonetheless advised to carefully consider the best alternative replacement lender(s) and earnestly negotiate with your existing lender adequate time to accomplish this vs. the costly alternative of filing for Chapter 11 reorganization protection (with less than 20 percent of small to mid-sized companies successfully emerging from Chapter 11 as operating companies).

6. Finally: with your new lender(s), replace the festering carryover feeling of partial lender blame to a resumed leadership role of responsibility with greater intensity for returning a revitalized company to profitability.

Lawrence Gardner is president of Lawrence Gardner Associates, managerial and financial consultants in Troy, a member of the Detroit Regional Chamber.