There is something perverse about a recession-hit company being bullied by a bank whose own finances are in a far worse state. When it comes to renegotiating loans, borrowers should exploit the banks’ weaknesses.

When your bank has avoided going into liquidation only because you – as taxpayer – bailed it out, it is ironic that your lender seeks to strengthen its own balance sheet by damaging yours. Yet however bleak your own finances, don’t assume the bank has all the cards.

Banks are frequently seeking to roll-over loans only on onerous terms because they would rather shrink their own balance sheet by demanding repayment. Yet there are two things worse for the bank than the borrower not servicing the loan: one is writing down the debt, the other is converting it to equity.

Write-downs mean losses and losses erodes the banks’ capital forcing them to cut their lending by a multiple of almost ten times as much. Lenders have no wish to repeat the record losses reported in early 2009.

Yet a debt-for-equity swap fills the banks with an even greater fear. They have no wish to hold illiquid and unsaleable shares, especially those in an unquoted business. The Basle committee ratios that dictate how much capital a bank needs to back up its assets are even tougher for equity holdings than for debt.

So the business being squeezed on the terms for repaying its debt should suggest that the alternative is the bank accepting an equity stake. The bank will quickly want to talk about writing-off part of the debt instead.

But if it finds even that too unpalatable, it may well be open to an agreement to amortise the loan over a longer period – or at an unspecified date far in the future. Or it may be willing to ease covenants and accept a lower interest rate if the borrower can pay.

A loan that is being serviced - even at a low rate and even if the principal is not being reduced and even on weaker covenants - is a good loan in banking terms.

And so long as it remains good it does not have to be handed to the recovery department and write-downs or debt-for-equity swaps do not come onto the bank’s agenda – and thus not onto the borrower’s.

So however bad your own balance sheet looks, just remind your bank how bad its own finances are – and how it would be foolish to make them worse by asking too much of your business.

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