Sometimes bankers find themselves in the position where they have business clients that no longer meet the bank’s qualifications or requirements.

When this occurs, bankers are in a situation where they must think about asking these clients to leave the bank. For many, this can be an extremely distasteful and difficult thing to do.

One of the conflicts that bankers have in asking clients to leave is that they’ve gotten friendly with them, and this can make a difficult situation even more difficult. Another conflict for bankers is that they don’t want to give up any of the income those clients may still be generating. Nobody wants to give up income, but at the same time, if the client is no longer meeting bank requirements, it’s really in everybody’s best interest for that client to move on.

Typically, bankers like to ask clients to leave as non-confrontationally as possible, but sometimes, clients don’t make that task at all easy. Clients may try to paint a very rosy picture of things to come in the near future and will persuade their banker to “hang on” a little longer.

What typically happens is that the banker sets a deadline for a client to be out of the bank, and then the client comes back to the banker and tells him that they just couldn’t find new financing, so the banker gives the client an extension. What the client usually means, however, when he says he can’t find financing, is that he can’t find financing at the same price that the bank has been charging. This is certainly not surprising because other banks will probably not be interested in this client either, and alternative sources of funding that would be willing to take on the risks associated with lending to this client will almost always charge more as a direct result of that added risk.

Giving extensions

So, the cycle continues; the client doesn’t secure new financing and the banker keeps giving extensions.

Ultimately, the practice of giving extensions is just the kind of thing that can lead to lender liability. And lender liability is of major concern to banks, and an issue that is always center stage for bank attorneys.

The message that attorneys try to convey to bankers with respect to lender liability is that they should go by the contracts that the bank has with its clients, and do what those contracts say the bank is going to do. This is the only way to avoid exposing the bank to added risk. When bankers keep authorizing client extensions, or make concessions, they establish a pattern that their clients can then think of as new terms of their contracts, and that’s when lender liability situations are created.

So how can the process of asking a client to leave the bank be made less distasteful for all parties involved and help bankers to avoid lender liability? First, it’s important for bankers to understand the benefits both to the bank, as well as to the client, in getting the client out as quickly as possible.

In terms of the benefit to the client, one must evaluate the possible lost opportunity cost for the business that’s associated with remaining at a bank that wants them out. Months that go by with a lender that cannot or will not provide an appropriate amount of financing, or financing that is structured appropriately to the real needs of the business, eat into the projection of future business results, and the business could actually suffer. It is, therefore, extremely beneficial for the client to form a relationship with a new lender who is able to meet the business’ needs sooner as opposed to later.

The same can be said to a certain extent for the banker who gives client extensions. Once the bank wants the client out, it means the client is “out of formula” with the bank, and the banker has to start monitoring the client much more closely. The real costs of servicing that client then increase at the same time the risk to the bank is increasing. All the more reason to get the client out as soon as possible.

Alternative sources

It’s equally important for bankers to align themselves with lenders who can provide alternative sources of funding. Asset-based lenders fall into the category of alternative funding sources, and it’s in the bankers’ best interest to cultivate relationships with these lenders so that when they need to ask clients to leave the bank, these lending sources can potentially help out and take their clients on.

Recommending possible new lenders can help diffuse what sometimes becomes an ugly situation, helping the client to better spend his or her time looking for a new lending relationship, and can ultimately speed up the process of exiting the client from the bank. In addition, from a public relations standpoint, providing as much help as possible to the client can help mitigate the circumstances under which the client might “bad mouth” the bank to other clients or prospective clients.

There’s another factor to consider from a public relations standpoint: If a client goes through a series of extensions, and then gets moved over into the bank’s Special Assets department (the area for what banks call “troubled loans”), someone from Special Assets, who is unfamiliar with the client will then be the one to ask the client out of the bank. This is not the most “friendly” way to handle matters.

The sooner the banker confronts a client with the facts, explains why the bank needs to ask the client to leave, and helps the client by recommending potential new lenders, the less exposure the bank has to lender liability and the quicker the client will be able to resume normal business activities. Moving on is in everyone’s best interest.

Evon G. Rosen is senior vice president and director of marketing for Celtic Capital Corp., a provider of asset-based capital from $500,000 to $5 million. She can be reached at [email protected].

Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.