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Avoiding Bankruptcy
Question: What can banks do to help small businesses avoid bankruptcy?
Answer: The soft economy, the rise of inflation and the curtailment of credit is having a dramatic effect on small businesses. Annual bankruptcies rose 50% in 2007 and this could potentially climb higher this year as the recession takes hold. Bankers need to undertake a comprehensive review of their small business loan portfolios and implement a risk mitigation program that engages small businesses to help them identify any emerging problems that can lead to poor performance, a distressed condition and ultimately insolvency.
Banks need to be proactive. By taking action now bankers will help small businesses to recognize the early warning signs of an emerging distressed condition. Banks can take the lead and begin an effective engagement process by conducting seminars that disseminate information and provide tools to help businesses identify sources of risk in their business operation. Small businesses need help in understanding how changing market dynamics and macroeconomic factors are impacting their business. Examples of this are the problems posed by inflation. For multiple reasons, inflationary pressures are an acute threat to small businesses. This is particularly true for businesses that are highly dependent on a commodity source to manufacture or deliver its products. Here profit margins are highly correlated to stable commodity pricing and small businesses profitability can evaporate overnight due to exposure to this single risk factor.
Effective bankers need to be involved with their small business clients to determine how these risk factors are affecting business profitability and what steps need to be taken to temper the effect these business threats.
This is a great opportunity for bankers to enhance their engagement level with small business clients. The exercise will preserve relationships, mitigate potential credit defaults and build the banks brand as an effective and involved partner to small businesses.
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First published on BankersOnline.com 4/28/08
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