Laughing All The Way From The Bank

How a few clever companies finance their growth without relying on those undependable lenders

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THE DAY THE BANK CALLED his loan, Bob Hofmiller thought it was some sort of a joke. He couldn't believe that any lender would choose that particular moment to end its relationship with his company. After all, bridge decay was a hot issue in the summer of 1984, thanks to the collapse of a bridge on the Connecticut Turnpike the previous year, and Hofmiller's company -- D.F.M. Enterprises Inc. -- just happened to be in the bridge-inspection-equipment business. After years of scraping by, D.F.M. suddenly found itself deluged with queries from around the country. In a matter of days, New York State was due to sign a contract for more than $1 million of D.F.M.'s bridge-inspection devices, and other big orders were in the offing. "And once we had an order in hand," says Hofmiller, D.F.M.'s vice-president, "there was practically no risk."

But the bank didn't see it that way. "Our local bank had just been acquired by Connecticut National Bank," he recalls, "and the new guys told us to pay off our loans. They wanted nothing to do with us."

For the next few weeks, Hofmiller and his brother Richard, president and founder of D.F.M., scrambled to find another source of capital. With the company's future hanging in the balance, they finally convinced a local savings bank to lend them $50,000. Today, D.F.M. Enterprises (#124) is a $2.2-million business sporting a $500,000 line of credit.

To talk with the chief executives of INC. 500 companies is to hear one story after another of narrow escapes from cold-footed bankers -- loans abruptly canceled for no logical reason; banks getting merged into indifference; sympathetic lending officers disappearing just when they are needed most. Whatever the proximate cause of the trouble, the news always comes as a shock and usually elicits the same response -- something very much akin to panic. Most executives respond as the Hofmillers did and go pounding the pavement in search of another bank. Some look for capital from another funding source. But a few INC. 500 companies have taken an altogether different route, developing strategies that minimize such problems by leaving bankers and other investors on the sidelines.

Take Scosche Industries Inc. (#269), which designs, manufactures, and distributes car-stereo accessories. Roger Alves, president, and Scotia Alves, vice-president, started the company on a shoestring back in 1980 and soon realized that, to survive, they would have to make the shoestring stretch. "We were always tight on cash," says Roger. Hoping to conserve what cash they had, he negotiated supplier agreements that included a "Just-in-Time" twist. Rather than taking delivery in one shipment, Scosche would often divide up an order so that materials would be delivered as they were needed. The company thereby kept its payables relatively low and reduced its need for bank credit. "I find that the best vendors are happy to accommodate us," says Roger, who continues the practice today even though Scosche is well beyond the shoestring stage, with such customers as Sony and Radio Shack and annual revenues of $3.6 million.

For Richard B. Boyd Sr., it was the downturn in the Texas economy that forced him to look for ways to conserve cash. Before that, he had relied on personally guaranteed bank loans to fund the rapid growth of Ford's Chemical & Service Inc. (#499), a Pasadena, Tex., manufacturer of pesticides. Then the banks turned squeamish. "If I were losing money like they are, I'd be petrified too," he says.

Like the Alveses, Boyd went to his suppliers for help with his cash-flow problems, persuading his biggest source, The Dow Chemical Co., that it was better off having a healthy customer than a floundering debtor. Dow agreed to ship raw materials in November and wait for payment until May, after the spring selling season. While some suppliers haven't been quite as flexible, major suppliers give Boyd 60 or 90 days to pay. That doesn't answer all of his capital needs. "We'd like to build bigger facilities and buy better packaging equipment," he says. But he probably has a better shot at getting long-term financing for those projects, now that he has reduced his company's revolving bank credit. "Without these deals, we'd need another several hundred thousand dollars in working capital."

If vendors offer one potential alternative to bank credit, customers offer another. Silver Lining Seafoods Ltd. (#152) uses both, although that was not always the case. In its first four years of operation, the company, located in Ketchikan, Alaska, covered its short-term cash needs by borrowing from a small Alaska bank. (Long-term financing came from 25 limited partners, to whom it passed along tax credits and depreciation.) Then, in July 1984, the bank suddenly canceled its credit line with no advance notice -- right in the midst of the fishing season, when cash was needed most. "The lending officer was new to our account," says managing partner Terry L. Gardiner, "and he didn't know the difference between operating losses and tax losses. So he looked at our tax losses and thought we were illiquid."

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