Well, it might finally be happening. The recession that has eluded for the last 12 years is right on our doorsteps. Recessions aren't new, and the economy will be fine. However, recessions mean that lenders have to work differently. Rather than focusing on speed, competition, and growth, lenders generally have to invest far more time in keeping their existing business safe, rather than generating new business.
Recessions hit lenders especially hard because they’re staffed to handle a specific growth plan and an expected rate of delinquencies. Lenders have to refocus their workforce to spend more time on deals in trouble and less time on everything else, including new deals and staying ahead of portfolio management to identify the next business in need of help.
Nobody gets into lending because they enjoy working with struggling borrowers, but we all know that times like these are inevitable. Times that are spent protecting the portfolio.
Delinquencies, defaults, and work-out situations are incredibly painful. Not only are you forced to make decisions that will determine the lives and livelihoods of your customers, you also can’t run your business optimally when you’re focused on broken loans.
In order to avoid all of that pain, it’s critical to help your clients before it’s too late. To develop mutual solutions that fit their financial position so they can continue paying you before their problems get too severe.
The secret sauce to weathering a recession is simple and can be understood in 3 steps that will never change:
- Interim financials are your best friend.
- Set up financial triggers to identify risk sooner.
- Review steps 1 and 2 all the time.
While these steps remain the same, this recession can be different. In the entire centuries-long history of lending, there has never been this much technology available to help. Let’s dive in.
Step 1: Interim financials are your best friend
There is so much alternative data in today's credit world that sometimes lenders lose sight of the fundamentals. Remember that interim financials – traditional data – are and will continue to be your best source of insight into your clients’ financial health. Collect them as often as you possibly can.
If you don’t collect them today, see what you can do to start collecting them. Lean on the relationship, beg them to help them help you, and if it comes right down to it, you can offer an incentive. The alternative is far more expensive.
It is nearly impossible to monitor your portfolio and understand your risk if you do not collect interim financial statements from your borrowers. Without interim financials, the best you have is whether or not they're making their payments! That's certainly a lagging indicator. The first missed payment is likely to tell you that you’ve already received your last payment.
Of course, your understanding of any borrower’s financial performance increases in proportion to the frequency at which you collect interim financials. Annuals are basically useless unless the recession is aligned with fiscal year by some stroke of ironic luck. Quarterly financials are better, but a lot can happen to a business in three months during a recession. Monthly updates are ideal; they allow you to identify risk in your portfolio before a borrower misses a payment and allows your team to work more proactively.
“But I’m not set up to handle that workload,” you say. I’ll get to the solution on that soon enough.
Step 2: Set up financial triggers to identify risk sooner
If you're collecting interim financials, you need to set up calculations, ratios, margins, and changes in trends as early warning triggers. As a leading indicator, these triggers will steer your team toward the right borrowers as early as possible.
Ensuring that your firm has the capacity to spend more time with more of your borrowers is critical to weathering a recession. Without these triggers, you’re wasting your limited capacity.
Let’s imagine a financial trigger that could be game-changer. Borrowers in trouble are likely to stretch their payables. Wouldn’t it be great to be able to list your borrowers in order of longest Days Payable Outstanding (DPO), or even by the fastest growth rate of DPO? You would have a prioritized list of borrowers to call TODAY to ask how things are going and to see where you can help.
It's important to note that the borrower is neither in default nor delinquent at this point. You already tell your borrowers that you're their trusted partner. This is an opportunity to show them you’re ready to live up to that. And if you do that in the dark days, they’re going to remember when it’s sunny again.
Step 3: Use technology to review steps 1 and 2 all the time
“Someone once asked me why McDonald’s is so successful. I said ‘our bathrooms are always clean.’ ... ‘Sure,’ he said, ‘But that’s easy.’ ... ‘Well, are your bathrooms clean?’”
We all know that we can do it, but do we have enough time to spend on it? It's a task that's halfway down your to-do list. With an ever-growing number of items at the top of your to-do list, it's easy to let these slip.
There is no use in collecting interim financials or setting up early warning triggers if you don't review them. Collecting interims, setting up early warning triggers, and reviewing your portfolio are natural steps for surviving a recession. The challenge comes back to capacity and diligence. How are you going to find the time with so many fires burning?
We’ve come a long way since 2007. Remember that was the year the iPhone was invented. The ability for us to solve complex business challenges with technology has grown exponentially. What formerly took hours of work to process and sort through financials now only takes minutes, or even seconds in the case of interims.
That’s why I founded Fincura. We’re ready for this moment.
We have worked to build a new generation of technology that is easy to buy (just give us a call), easy to implement (you're live the same day you sign the agreement), easy to learn (3 hours of hands-on training), and of course comes with the natural benefits of innovation: faster and better.
Short-term benefits, long-term advantages
The cool thing about using the next generation of technology like ours is that get another dimension of value. The work you put in to weather the recession actually becomes an investment in your future because you start to build up an internal data asset to use in good times and bad.
This dataset - your dataset - can help you not only in identifying risk sooner during a recession, it also will help you to more quickly identify good/bad fit deals when you switch back to growth mode, promoting clarity for sales teams and credit committees. It will help your audit and compliance teams to understand the decisions you made without having to comb through paper stacks and credit files.
The bottom line is that you will serve your customers better because you will have a better understanding of their financial picture.
There is no downside to learning more about today's technology, but there is a downside to maintaining the status quo. Every day is a missed opportunity when we can get you started today.
This is how to weather a recession. It's really simple.
Step 1: Remember that interim financials are your best friend. Collect them as often as you possibly can.
Step 2: Set up early warning triggers so that you can get ahead of risk. The sooner you identify it, the better off both you and your customers will be.
And step 3: Review your portfolio all the time.
I know what you're thinking. It's not a fun process. It's tedious. It's time-consuming. It's expensive. But remember that it's 2020. And technology does exist that enables you to do this pretty easily.
By using technology, you also get to build up a data set for the future. Every day that goes by increases your risk and is potentially a missed opportunity. You can get started in less than a week. Why not get started today?