Introduction
We See What You Do Not Say: How Banks Detect Financial Weakness Before You Do
By Hindol Datta/ July 10, 2025
Part I: The signals you do not speak
Early in my career, I learned that banks do not just hear what you say. They watch what your numbers whisper. In fact, much like fraud detection in banking or broader fraud management in banking, lenders rely on subtle signals rather than surface assurances. A confident update is nice, but accounts payable tells the truth. A polished forecast is valid, but AR aging tells the story. Credit teams think in probabilities, not narratives. They look for small shifts that become significant problems if left alone, patterns that echo the way fraud detection tools in banking flag anomalies. Days’ sales outstanding are inching from 52 to 57. Payables are quietly stretching from net 30 to net 45. Inventory is swelling faster than revenue. These are not random bumps. They are patterns that a lender has seen many times.
This is not about mistrust. It is about discipline. Bankers are trained to find early indicators so they can act before a borrower runs out of options. Many leadership teams pride themselves on top-line growth, margin expansion, and product milestones. Fewer teams study working capital the way a credit officer does. That gap creates a divergence between the story you tell and the picture you present. Risk is born inside that divergence.
I have guided founders and boards through this shift in perspective. Read your business the way your lender reads it. Ask what your borrowing base report says about operational health. Ask what a rising 60-plus AR bucket implies about credit discipline and collections execution. Ask what a drop in eligible receivables means for liquidity three months out. When you start asking those questions before the bank does, you move from defense to credibility.
Part II: When the bank sees weakness before you do
The toughest lesson came during a revenue downturn at EDG. Our partnership with the bank became tenuous. Nothing was broken on day one. Covenants were technically in range. But our trend lines had shifted, and the lender saw it in real time. DSO crept up. Inventory rotated more slowly. The borrowing base cushion thinned just as pipeline quality softened. Silence from the bank was not comforting. It was a recalibration.
That was the moment to decide two things. First, at what point do our financials begin to reflect a weakness that the bank will foresee? Second, what is our mitigation strategy, and how quickly can we implement it within the company? We built a simple trigger map. If DSO rose by more than five days, we tightened credit terms on new deals and activated a focused collections sprint on the oldest 20 percent of invoices. If inventory turns fell below target, we paused reorders on slow-moving items and cleared aged stock through controlled discounting. If the eligible AR-to-total AR ratio dropped, we pulled forward renewal invoicing and shortened acceptance windows. Alongside these operating moves, we increased the reporting cadence to weekly cash and covenant snapshots with short narrative memos. We did not wait for the bank to ask. We explained what changed, why it changed, and what we were doing about it.
Internally, we aligned leadership to the new posture. Sales shifted compensation toward cash collected, not just bookings. Operations are committed to fulfillment cycles that support revenue recognition timing. Finance embedded lender metrics into our dashboards so every department could see how daily choices affected headroom. The message was simple. Financials are not outputs. They are signals. Our job is to change the behavior that produces the signal.
Part III: Think like a credit officer
Credit officers view indicators in combinations, not in isolation. A rising DSO with stable AP days may be manageable. Rising DSO and rising AP days signal liquidity stress. A larger inventory balance is not a problem if demand is proven. A larger balance with slipping sell-through is a red flag. Translate operational moves into ratio math. If churn drops by one point, illustrate how EBITDA and interest coverage are affected. If payables are extended by ten days, show how the borrowing base and availability are affected. When your lender sees you make these links, you shift from being monitored to being trusted.
Use strategic parsimony in communication. Say less, signal more. Every quarterly update should answer three questions. What changed. Why did it change? What are you doing about it. Bring a short sources and uses table, a one page risk bridge, and a forward view of covenant cushions under base and downside scenarios. Banks do not need every spreadsheet. They need clarity that reduces uncertainty.
Part IV: Institutionalize the mindset
Build an internal credit muscle. Reverse engineer your borrowing base each month. Ask what a credit committee would infer from the movement in eligibility, reserves, concentrations, and advance rates. Embed a credit optics panel in your ERP or dashboard that translates operations into indicators a banker watches. DSO volatility. AP aging beyond thresholds. Inventory to sales mismatch. Availability deltas. Make these visible to the whole leadership team. Behavior will follow visibility.
Agree on thresholds that trigger action without a meeting. Five-day DSO rise. Two-week slip in cash conversion cycle. Ten percent drop in eligible AR. When a trigger hits, the playbook runs. Collections sprint, terms tightening, discount governance, spend controls, and weekly lender updates that explain actions and expected timing. Speed matters. Silence invites reclassification.
Part V: From weakness to plan
In a soft patch, you cannot buy credibility with adjectives. You earn it with cadence and math. At EDG, we moved to weekly lender calls for a quarter. We brought the controller, sales ops, and customer success leaders so the bank could hear directly from operators. We provided concise memos that linked actions to measurable outcomes. That posture did not change the economy. It changed the relationship. The bank gave us time because we gave them context and control.
The same approach worked when we scaled credit elsewhere. At Adteractive, we combined a $10 million line with $5 million in venture debt to fund growth assets, then earned a $35 million facility through predictable reporting and clean borrowing base hygiene. At Atari, we set up a 30 million revolver that flexed with retail calendars and foreign receivables. In each case, the
principle remained the same. Speak the lender’s language. Detect your own signals. Act early. Narrate precisely.
Ten ways banks foresee distress and how to mitigate each one
- Rising DSO and growth in 60-plus AR
Bank view: collections discipline and customer quality are weakening.
Mitigation: launch a 30-day collections sprint, tighten new deal terms, add cash collected to sales comp, and escalate disputes within 72 hours.
- Payables quietly stretching
Bank view: liquidity pressure, potential vendor strain.
Mitigation: segment critical vendors, return priority to core inputs, negotiate temporary terms transparently, and publish a weekly AP plan to the lender.
- Declining eligible AR while borrowings rise
Bank view: collateral quality falling, availability at risk.
Mitigation: accelerate renewals, reduce non-eligible exposure, shorten acceptance windows, and improve invoicing accuracy to cut exceptions.
- Inventory growing faster than revenue
Bank view: demand planning is missed, and trapped cash.
Mitigation: freeze reorders on slow movers, controlled markdowns to clear aged stock, tighten S&OP cadence, and link buys to paid orders.
- Concentration risk in top customers
Bank view: single point failure risk in cash flow.
Mitigation: cap exposure per account, diversify pipeline, require deposits or milestones, and show cohort retention and renewal probabilities.
- Shrinking borrowing base cushion
Bank view: reduced headroom, higher breach probability.
Mitigation: weekly availability snapshots, discretionary spend controls, pause non-essential hiring, and add a temporary cash buffer via term draw or equity bridge.
- Covenant cushions eroding quarter to quarter
Bank view: trend deterioration, not noise.
Mitigation: Pre-negotiate seasonal or rolling measures, propose temporary recalibrations with enhanced reporting, and display scenario trees with corrective levers.
- Gross margin compression without a dated recovery plan
Bank view: structural pressure on cash generation.
Mitigation: SKU mix shift, vendor renegotiations, pricing actions with win-loss tracking, and monthly margin bridge shared with the bank.
- Forecast misses that arrive as surprises
Bank view: weak planning and late escalation.
Mitigation: adopt rolling 13-week cash and 12-month scenarios, install trigger thresholds, and send early heads-up notes with base and downside impacts.
Management turnover or conflicting messages
Bank view: execution risk and governance doubt.
Mitigation: designate a single lender voice, bring operating leaders to briefings, provide an org stability plan, and succession coverage for finance roles.
