Steve Womack
Michael Miller

When times get tough, and your organization faces an economic crisis that leads to serious cash-flow problems, keep in mind this important maxim: View lenders as partners, not adversaries.

The recent global economic downturn has propagated countless articles expounding upon the difficulties healthcare organizations face in securing adequate, affordable, and acceptable financing amid worsening capital shortages. Equally important is that healthcare financial leaders manage, and even enhance, their organization's relationships with existing capital partners.

Sustaining good relationships with existing lenders, particularly in difficult times, is a critical step that may ultimately see you through a capital crisis. Should a liquidity crisis occur-be it anything from a technical debt default, such as tripping a covenant, to actually defaulting on a scheduled payment-it is all too easy to begin to see the lender as an adversary. But remember, when times were good and the loan documents signed, you likely saw the lender as your trusted partner. Altering that view can be counterproductive, and can unnecessarily complicate the situation. In a credit crisis, as much as possible, you should build on your partnership with the lender so you both perceive that you are working together to resolve the issue.

In our experience, five actions, or predispositions, have time and again proven themselves to be indispensable to healthcare organizations in working through difficult times with lenders:

  • Communicate early.
  • Demonstrate truthfulness and integrity.
  • Educate lenders with industry knowledge.
  • Have a plan.
  • Demonstrate a consistent commitment to achieving the plan.

Communicate early. Like all of us, lenders do not enjoy hearing bad news. However, if your lenders hear about it late, discover it for themselves, or read about it for the first time in the press, the consequences will be significantly worse: They may decide to make available to you only reduced and more invasive options, and such options often can be radical departures from core business or services. Lenders are likely to be particularly angered if disclosure is not made until an issue has mushroomed and a crisis has emerged, at which point they may be less amicable to waive or modify restrictions and/or make concessions. Even worse, lenders are likely to see a debtor's hesitancy to disclose a crisis or admit to distress as a sign of a more serious problem, such as fraud and misrepresentation.

It's far better to inform lenders of problems early so they can be part of the solution. Remember, your banker also reports to a manager or board, which allows the banker to communicate within the organization early and demonstrate knowledge of the current issues. At the end of the day, the lender-creditor relationship is a relationship of trust. When parties trust each other, a bad situation becomes less complex and more workable.

Demonstrate truthfulness and integrity. The saying "honesty is the best policy" is especially true when dealing with the lending community. In some instances, debtors may find themselves delaying giving bad news, which has never produced a good outcome for borrowers. Sooner or later, the facts will emerge, and as the issues become public, your organization will suddenly lose much-needed credibility with the credit community. Also, lenders regard telling the whole truth-not just accurate and factual information-as equally important. Many lenders consider the failure to provide all information as the equivalent of not telling the truth.

Educate lenders with industry knowledge. Although many lenders have significant experience with healthcare operations and financing, many others are from other industries and may not understand the issues as well as you do. And even if your primary lender contact is knowledgeable about health care, the same may not be true for all of the layers of analysts, loan officers, and committee members who the contact represents within his or her organization.

Take the time to make sure your business plans and other communications are written in layman's terms. Your creditor's staff will deeply appreciate your efforts to define and explain clinical concepts, unfamiliar terms, and abbreviations. And you will not only generate goodwill by lessening confusion about the industry, but also ensure that your plans-and analysis-are correctly understood.

Have a plan. When a lender learns of a credit default or covenant trip, or receives other bad news, the lender will always have one question foremost in mind: "Am I going to get paid?" The follow-up questions revolve around such issues as:

  • Whether the business can recover from the situation
  • Whether the current management team is capable of turning things around
  • Whether additional cash infusions will be necessary
  • What steps are the quickest and best to immediately address the problem

When the bad news is delivered, having a plan in hand will go a long way in easing creditor concerns and getting them to focus on solving the problem, rather than talking about it.

  • A viable corrective action plan:
  • Defines the problem
  • Identifies solutions
  • Sets reasonable, achievable, measurable, and timely actions
  • Sends a positive signal to the lenders and stakeholders that the institution acknowledges the situation and is serious about implementing needed changes

Having such a plan can help ensure that you will work directly with the lender, rather than see the debt transferred to a special assets workout team.

Demonstrate a consistent commitment to achieving the plan. Lenders monitor turnaround plans closely. Even if you experienced an unforeseen financial crisis, as long as you communicated early, were truthful, provided work product with integrity in the numbers, translated technical information into laymen's terms, and executed a fluid and flexible plan, your lender may not be happy but will be more likely to continue to work with your management team. Moreover, reaching and maintaining consensus with your lenders will go far in effecting a smooth and timely recovery. Although you and your management team may justifiably believe your lenders cannot match your knowledge of your particular service offering and market(s), don't forget that most lenders do have experience with managing and remediating troubled facilities. There is much to be learned and implemented through shared knowledge and experience, and being open to learning is one of the best ways to show that you can be trusted to follow through with your plan.

Until they are absolutely convinced that existing management cannot turn the situation around, lenders will work with you. The key? Take the proper steps to communicate and to educate them along the way. Trudging through a credit or liquidity issue is never enjoyable, and it is to be hoped you will never have the experience. But should such a crisis befall your organization, approaching it in a team spirit with the lender may yield a more positive and successful outcome.

Steve Womack, FHFMA, CPA, is principal, Bridge Associates, LLC, Brentwood, Tenn., and a member of HFMA's Tennessee Chapter. (

Michael Miller is director, Bridge Associates, LLC, Brentwood, Tenn.

Publication Date: Sunday, November 01, 2009

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