Me and My Banker

Analysis of the relationship between a CEO of a growing company and his banker.

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A hot-company CEO and his banker open up about a relationship that actually works. Sort of

Too little working capital had been a constant at PlanGraphics Inc., a consultant in and designer of automated geographic information systems (GISs). But in 1994, with 65 employees and seven offices worldwide, PlanGraphics faced a capital deficiency that threatened to hit $1 million. Founder John Antenucci wasn't concerned. But his banker, Gordon Taylor, thought that was too much for a company barely doing $5 million in sales.

Taylor, PlanGraphics' loan officer for the last decade and a vice-president of Farmers Bank & Capital Trust, in Frankfort, Ky., wanted globe-trotting Antenucci to stay home, handle expenses, shrink overhead, maximize profits, and give the bank good financial information. "You're not running a profitable operation," Taylor lectured, "and your balance sheet doesn't support your credit. My bank has gone as far as it will go."

Indeed the bank had gone even further. Toward the close of 1994, PlanGraphics had overdrawn its $800,000 line of credit by $300,000. If Taylor had returned those checks, he could have killed the company. But Antenucci wasn't alarmed. "Entrepreneurs come up against barriers. They're walls to some; to others, they're only hurdles."

Among the country's tiniest capitals, Frankfort empties to a hard-core population of only 28,000 when the state government closes for the day. Although Frankfort boasts the commerce-supportive Federal Expresses, stationers, lawyers, and other components of a big city, it also has the on-a-first-name-basis fraternity of a small town, which essentially it is. In proximity that few businesses enjoy with their banks, PlanGraphics sits catercorner from Farmers across West Main Street. The bank and its prime small-business customer are such close neighbors that Farmers rehabilitated and then leased to Antenucci the turn-of-the-century dry-goods store where PlanGraphics' world headquarters are located. Lender and borrower, landlord and tenant, Taylor and Antenucci literally can peer into each other's office. And, in a way, they do.

As PlanGraphics grew, its borrowing shed the tight skin of Small Business Administration sponsorship and was picked up by Farmers as conventional notes at various rates, 1% to 4% over prime. The notes were backed by the usual personal guarantees plus PlanGraphics' accounts receivable. "It's difficult to lend to service companies," says Taylor, "because they don't have a lot of hard assets. Their hard asset is the book of business they're actively pursuing."

Until recent setbacks, Farmers had been willing to lend 80% of that book "because of Antenucci's record of not having lost any money." And because public bureaucracies -- the bulk of PlanGraphics' client base -- traditionally pay slowly, Taylor extended the eligibility of the receivables as collateral from 90 days' aging to 120 days'. "One-hundred twenty-five thousand dollars was a lot of money for so small a company," Taylor says of Antenucci's initial credit line in 1986. "But we reviewed his need and the nature of the business." Part of that need was to meet the payroll of a rapidly multiplying and, to Farmers, unusually well paid staff, whose $45,000 a year average salary was triple that of the average Kentuckian.

As its credit increased so did PlanGraphics' business. Then, in 1991, the company suffered the first of two reversals. To bridge an unexpected shortfall, Antenucci took on a large engineering firm as an investor, parting with 18% of his company. As part of the deal, the firm lent PlanGraphics about $200,000 directly and guaranteed another $200,000 at Farmers.

Antenucci blamed his 1991 loss on the recession, on the sudden cancellation of contracts with government agencies and the like after work had been started. In a neighbor-to-neighbor plea that would be heard only in a small-town setting, he asked to appear before the bank's executive committee. At the session he described the complex technology of GIS -- graphic representations of statistical information on a map (the crop yields of farm areas, for example) -- and the characteristics of the chronically slow-to-pay but eventually good-for-it public-sector customers who account for 60% of PlanGraphics' billings. Then he went on to explain why he was in the soup: "We staffed up faster than we should have."

"Very few businesses get to speak to the executive committee," Taylor says, "because we feel it won't do any good. But John is a unique guy, and his presentation helped the bank understand the nature of his business." And instead of the tar-and-feathering Antenucci expected, he got a higher line of credit.

PlanGraphics' return to profitability in 1992 was so auspicious that the bank featured Antenucci in a two-page customer-success story in its annual report. "With PlanGraphics' extensive activities," the spread noted, "a personal, understanding banker is a tremendous asset." While those words were being set in type, unfortunately, PlanGraphics was on its way to another loss -- this one $600,000. "I screwed up. What we have is a case of expense and revenue mismatch," Antenucci confided to Taylor. "What the bank had," Taylor now says, "was a case of heartburn."

Antenucci continued hiring in 1993 as his backlog kept growing. Then he had the idea to stretch billing periods from four to six weeks "to allow our people to catch up with the paperwork." It didn't work. Invoices didn't get out as fast, and each month's closing was delayed all the more, exacerbating cash-flow problems. Most important, Antenucci didn't realize that expenses were outstripping revenues, because reports were two months behind.

"We weren't putting anything into the bank," he says. "We used everything we had to employ more people, to compensate people at a higher level, or to develop other growth-related sources like marketing and sales and larger facilities." As a result, PlanGraphics overspent its credit line by nearly 40%. The unbudgeted-for borrowing not only boosted the company's annual interest expense well past $100,000 but also raised its debt-coverage ratios to cosmic magnitudes. No wonder the bank had heartburn.

"A million-dollar loan is peanuts to Citibank or Chemical, but it's big for us," Taylor says. "The profit center of most banks is their loan portfolio. We'd bring this bank to its knees in a hurry by making bad loans. When the borrowings get substantial and the company's profit picture is not clear, the tendency is to shrink your relationship and shore up your security. By some of our people's perceptions, PlanGraphics was out of control."

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