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."

Look at it from Antenucci's standpoint: "In many ways, we used that loss to finance the next year's growth. We didn't have the internal capital, so we spent more than we had, to position ourselves for the next initiative. We were able to sustain a significant amount of growth and be competitive from a compensation point of view in the industry."

One of the financial rules of service industries that frustrates Antenucci is that "backlog has no value until you've done the work." Much of PlanGraphics' 1993 loss was spent building a $9-million backlog of business for 1994. And Antenucci thought that should well cover the bank's position.

Not to Taylor's way of thinking: "Yes, contracts generate receivables, but receivables protect a bank only in a liquidation. In the real world, if something were to happen to PlanGraphics, those receivables would be diluted because what was provided to the customer might not be payable unless PlanGraphics completed the subsequent phases of those contracts. No matter how much confidence I have in John Antenucci," he goes on, "when a line of credit comes under criticism, the loan officer has to counsel the management of the company to put things in better order.

"You might think if you just keep growing, you'll keep making money. John is proof that's not true. Normally, companies grow and then plateau and bring the organization along. Then they grow some more, plateau, and bring more organization along. That gives the company time to catch its breath," Taylor says. "But when management can't keep track of everything that's going on, can't tighten the controls, you wake up at the end of the year and you've lost $600,000, even though you've got a book of business that's more than it was the year before and the outlook for the future book is strong.

"Nobody runs a company like the fellow who owns it," says Taylor. Clearly, he felt that Antenucci could not run PlanGraphics effectively from the road. So he suggested that Antenucci "find someone who can sell while you're here, or at least find someone who'll manage the company while you're out selling."

Antenucci followed Taylor's advice and hired a chief executive to "give structure to the chaos around us and rigorously enforce rules on everyone, including on me." At the same time, Antenucci engaged a consultant to coach him in the intricacies of small-company finance and began a search for a chief financial officer -- not to repair the past but to prepare the future. "The financial picture has become more complicated. We work internationally and have to deal with conversion of funds and international banking instruments and the like. Farmers Bank, quite frankly, isn't adept at those things," says Antenucci.

Taylor made another suggestion: "Find financial support besides the bank." In other words, he was asking Antenucci to get him off the hook. Farmers, Taylor intimated, wouldn't be increasing PlanGraphics' credit line in the near future, even though PlanGraphics could offer as collateral as much as $1.5 million in receivables in a given month. "Banks can do certain things for short periods of time, but they can't do them forever," Taylor explains. "In spite of how much the bank may admire John Antenucci and PlanGraphics, we aren't always captain of our ship. We have external auditors, internal auditors, bank examiners, the FDIC and the Federal Reserve looking over our shoulders every day, and they look at the same things we look at: the size of the borrowings, the aging of the receivables, the profitability of the company. When the authorities feel you've overreached, they start classifying assets. And that reflects on the management of the bank. No bank wants to put itself in that position."

Then Antenucci suggested that they'd "all look a whole lot better" if the bank would redefine the overage by converting some of it to long-term debt, on which PlanGraphics would pay conventional principal and interest. Taylor's assessment of that gambit: "John's balance sheet of preceding years ate up whatever equity he had, and it takes a while to build that back." The bank would not be willing to restructure the debt until Antenucci's consultants "packaged the company so someone can look at it and make a prudent business decision whether to invest in it. You can't borrow your way out of debt."

Even as it became apparent in 1994 that PlanGraphics would have a profitable year, booking $500,000 chunks of business at a time, Taylor saw problems. "I don't think John's ever had anybody tell him how much it actually costs to do business. His profit is supporting more growth when it should be paying back existing debt because these profits are just going to generate business that his capital won't support. It will keep feeding on itself. When a bank is supporting a company that's losing money, the first thing that bank wants them to do when they're making money is to reduce their debt. You have to support growth with internal funds. Not your first year, not every year, but you ought to be working toward a goal of self-sufficiency."

Taylor also fretted about PlanGraphics' failure to emphasize the need for employees to get enough billable hours to "justify their salary and the G&A they create." And as PlanGraphics took on ever-slower payers Taylor proposed that Antenucci coax cash flow by "going to the big corporations and telling them you require 30% up front. Just don't bid on those contracts based on having to wait for your money."

Antenucci is practicing what his banker preaches. In a recent 60-day assignment from Unisys that would take 30 days on the client's side just to process the paperwork, Antenucci arranged to bill for the entire job well before it was completed. With Niagara Mohawk, a large electric utility for which PlanGraphics is involved in a multimillion-dollar project, Antenucci had already negotiated a 10% up-front mobilization fee.

But PlanGraphics' overdraft could be expunged only when some really slow payers put their checks into the mail. Of PlanGraphics' $300,000 overdraft in December, $250,000 alone was covered by a single receivable that was several months tardy from a Fortune 500 corporation. Taylor recognizes the problem: "Big companies design their systems so they don't pay you. They work the little fellows as hard as they can, and they break a lot of little fellows by doing it."

Taylor intends to see that PlanGraphics doesn't become one of the broken ones. "When companies get in the red from an overdraft point of view, you expect that it's temporary and will be over with quickly. A bank doesn't like to make a credit decision every day, but that's what happens when we have an overdraft situation. We're put into the position of deciding every morning whether or not to shut the company down and take the consequences. It's John's responsibility to prove the bank right in our support."

Fiscally, yes. Philosophically, Antenucci expects his banker to be responsible as well. "We write a fairly detailed business plan, but whether they appreciate the content, I don't know," he says. "My guess is, they don't. They're looking at numbers: 'You've got an overdraft.' I'm not sure Gordon really understands why people hire us or what we actually do for them. If Farmers had that appreciation, they could do their own assessment of where the market is heading and where we're going in it. Right now, Gordon has to trust my judgment that the market is expanding and that PlanGraphics is positioned to take advantage of the opportunities."

"Sometimes a bank can get too close to a borrower," Taylor reflects. "There's a personal relationship you strike after months of doing business where you feel you've got to send good money after bad just to keep the ship afloat until help comes. It's awfully hard to cut somebody off from a loan. We try to anticipate when that point will come, and to counsel. That's part of our job. Whether borrowers listen or not is their prerogative."

On the last business day of 1994, Antenucci trekked across the street with enough paid invoices in his hand to put his line of credit into a positive mode and himself and Gordon Taylor into an absolutely glowing one.

The point of no return had been avoided -- for the time being.


CAN THIS MARRIAGE BE SAVED?

A Consultant's View

To many a fast-growth entrepreneur, "it stands to reason that if you're making money, you must have cash -- you feel it's that way. But," observes Garry Meier, "that's not how it is." Meier is a financial consultant, principal of a St. Louis firm named Strategic Planning Management and Implementation (SPMI). After a year of overseeing PlanGraphics' profitability, Meier summed up the situation this way: Antenucci had fallen into the "functional liquidity trap," and Taylor wasn't prepared to rescue him.

The cash trap is a condition endemic to service companies: Collection of money due for contracts typically is slow -- taking 120 days in Antenucci's case -- while operational payables pile up in 30- or 45-day cycles. Because it's booking future growth, "the company creates a pyramid of dollars owed versus dollars paid." Simply put, the company's always 90 days behind expanding payroll, overhead, and supplies.

"Banks are interval lenders," Meier says. "A bank will lend you a certain amount, and that's it for six months. They don't understand that labor-intensive businesses have more need to borrow than bank conventions recognize." A company granted a $200,000 line of credit can eat that amount in a month to take on a million-dollar contract. Then comes a five-month famine that sets the lender to worrying.

The solution? Greater flexibility in lending procedures. To accommodate the peaks and valleys, Meier would have banks like Farmers readjust their lending limits not monthly or even weekly, but daily. Farmers' money "is just not enough," Meier complains. It reveals a "conservative mentality working against small business." What would be enough is 90% of accounts receivable -- a standard Meier has successfully negotiated for other service clients. That might not solve all of PlanGraphics' problems, but it would keep a lack of cash from holding back the business.

And from endangering the bank. "In the kind of labor-intensive atmosphere that Antenucci is in -- what I call a 'gray-matter business,' where the product is what's in people's minds -- you have to grow at 5% to 8% a year because you have to give your people raises or they'll go somewhere else. Without them, the company will be unproductive and stop making money. Because the bank isn't flexible enough, it puts its own investment in that company at risk. That's the part the bank doesn't understand."

What holds banks back is that gray-matter businesses aren't as transparent as the manufacturing operations with which bankers are more comfortable. "In manufacturing you produce a hundred baseball gloves; when you ship them to the customer no one can argue with the fact that they received a hundred baseball gloves. And the receivable's good because in the worst case, you can go get your gloves back. And I don't just blame the banking system," Meier adds. "There's a supply-of-funds problem in general for these kinds of businesses because funders look at them with an M.B.A. mentality, with formulas. That's too bad because companies like PlanGraphics are significant users of funds when they grow, and they're good for the economy. Unfortunately, bankers don't supply the money as fast as the users use it. Therefore there's a gap in the investment world to satisfy companies like John's."

Still, in its readiness both to raise PlanGraphics' credit as its receivables balance grew and to relax loan covenants, Farmers has been better than average, Meier concedes. Has it been great? "Well, no bank is great with a business."

On the other hand, PlanGraphics now submits to Farmers detailed monthly financials reviewed by a certified public accountant. "John has made significant strides toward becoming a better businessman," Meier observes. "In our own company, there are two kinds of clients: those that are going to die and those that have a chance not to. The ones who have a chance not to are astute enough to admit, 'I don't get this financially, it's too complex for me, I need help managing it.' Antenucci is in that category. But the ones who are about to die think they're bigger than the world; 40% of our firm's business is handling Chapter 11s, and 100% of those companies are there only because of their founders' stubbornness -- there's nothing wrong with the businesses themselves. Entrepreneurs don't understand finance is the short of it."

Last updated: Mar 1, 1995




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