BANKS
For all the changes sweeping through the equity side of the financing marketplace, there's as much, or more, taking place in the credit or lending arena. These are tumultuous times for bankers, who either must reinvent themselves at the giant banking institutions being formed through a series of mergers and acquisitions across the country, or must figure out new ways to compete against those giants from their own smaller regional bases. Either way, it boils down to a set of competitive pressures that are remarkably similar to those facing equity investors. Today's bankers can no longer simply sit back and rely on all those old business-as-usual strategies that often left cash-starved entrepreneurs out in the cold.
Brett W. Kaplowitz, a vice-president at Potomac Valley Bank, in Gaithersburg, Md., exemplifies some of the changes occurring among small banks. One morning last November, Kaplowitz had just finalized plans to bring lunch to the offices of a business customer too busy to meet him at a local restaurant. "I try to sit down with my business customers over lunch or a cup of coffee regularly," he says. "That way I can stay on top of what's happening with them and their companies and look for new ways to help them solve problems."
With only $190 million in assets, the Potomac Valley Bank might seem at first glance to offer growth-oriented business customers only limited options, besides those chats over lunch. But that's not the case. "We're part of an affiliation of 22 community banks, mainly in the state, which among us hold $7.1 billion in assets," he explains. "On the one hand, we at Potomac Valley have the ability to approve loans of up to $1.8 million by ourselves. On the other, we can offer much larger financing packages, when our clients need them, by working with our affiliates. And we've also got the ability, as part of a large network, to provide the same sophisticated kinds of cash-management, 401(k), and other services that the giant banks can offer." Such affiliations are cropping up among small banks all across the country, in part because they've got to compete not only with bigger banks but with credit-card companies and other financial-services organizations that offer this type of full-service menu and are hungry for a share of the small- and midsize-business market.
While not every banker wants to be every entrepreneur's friend, the bank-financing marketplace too has been changing in all kinds of positive ways. Some of the country's biggest banks, including Fleet and Wells Fargo, have aggressively stepped up marketing campaigns in the interests of wooing more entrepreneurs.
Another hopeful sign is an increase in so-called microlending, typically defined as business loans less than $100,000. According to a recent survey by the U.S. Small Business Administration's Office of Advocacy, 478 banks across the United States are involved in a significant way in this market. The group increased microlending activity by 26% just from 1995 to 1996, raising its total level of involvement to $15.8 billion at last estimate.
There are other indicators as well. One is the willingness of many bankers to form partnerships with other financing entities in cases in which they might be afraid to assume all those growth-company risks by themselves. For lack of a better phrase, think of this as the world of layered-financing opportunities--since bank deals get layered into arrangements involving equity sales or other transactions. The good news is, it's a world that's only as limited as your imagination.
Layered financings are the ultimate outcome of all that competition out there that's transforming the financial marketplace. The idea is that business owners can be on the lookout for both loans and equity financing. On one hand, they can allay bankers' anxieties over proposed loans through the involvement of seasoned investment professionals in their companies. On the other hand, they can reduce the amount of equity they need to give up by including bank financing to meet their cash needs. It is really just a growth-company version of the kind of multitiered-financing strategy that large corporations have been able to rely on for years. Here again it's a way that more and more of today's entrepreneurs are getting to share the goodies that the capital markets have to offer.
There's no single formula for how to make a layered-financing deal happen. In the world of fast-growing businesses, it usually takes place because cash-strapped owners pursue every possible capital lead they can come up with, often at the same time. In some cases, a banker gets interested, but he or she expresses anxieties about perceived risks; a credit-line commitment might be offered, contingent upon the company's being able to carry out some type of equity offering simultaneously. In other cases, the financing sources might get layered in one after another, as is the case when an angel investor can use his or her own network of contacts to quickly bring in a banker or other financing institution.
Granted, whatever the type, layered financing can be time-consuming to coordinate, since business owners (or their chief financial officers, if they have them, or their investment bankers or accountants) need to pursue two different sources of capital simultaneously. But the results can be well worth it. Square Earth Inc., for example, a $2-million New York City-based Web-systems developer, tried but failed to qualify for a term loan by itself. "But given the financing opportunities that exist for us in the private-equity arena and our growth rate this year of 25% per month, we were able to win a loan commitment from a bank that would come into effect as soon as we carried out a private placement," notes CEO Brad Galle. "That's going to work just fine for us."
A growing trend in some areas is for federal or local government-financed programs to provide whatever capital gets layered in with bank money. "Here in Los Angeles, we've got about half a billion dollars' worth of federal money supporting community-development banks. They can provide venture-capital funds, revolving lines of credit, and all kinds of other financing arrangements for small businesses," notes Jesus Arguelles, a Los Angeles-based business financial consultant who helps entrepreneurs raise funds. "What I see, when I'm putting together capital deals, is that traditional banks will be much more, shall we say, flexible when there's government money coming in at the same time."
