Credit Where Credit is Due
Community banks may be your best bet in today's economy
Larry Simon's banking problems wouldn't come as a surprise to many entrepreneurs. Simon is CEO of 11-year-old Interserv Corp., a manufacturer based in Bloomington, Minn., that has sales of more than $2 million. About eight years ago, Simon became convinced that his company would have tremendous growth potential if it could reorient its sales of high-priced equipment away from the semiconductor industry and toward the developing high-definition and flat-screen-display markets. "This business is going to be huge in the future. Interserv could be an IBM one day," Simon says today with a founder's confidence.
But during the mid 1990s Simon discovered that his bankers didn't "get" his capital-intensive growth strategy and, in the short run, were worried about the company's exposure to a semiconductor downturn. "We started out with the attitude that a big bank was a good bank," he recalls. "And when you've got plenty of money and times are good, big banks certainly are happy to do business with you. It's only when you need them to take a chance with you that you realize that's not necessarily the way things will always be."
Bankers are by nature cautious -- which can translate into a reluctance to back younger, risk-taking, growth-preoccupied companies. In uncertain times like the present, that reluctance can intensify into a downright aversion.
Recent messages to entrepreneurs from lenders are still mixed, but warning signs abound. This past February, for example, Heller Financial announced it would not write any new Small Business Administration-backed loans, although the institution previously had been one of the top providers in that market. Around the same time, the Federal Reserve reported that 45% of domestic banks had tightened their standards on loans to small businesses.
Mergers among big banks have compounded the problems. Five megabanks (J.P. Morgan Chase & Co., Citigroup, Bank of America, Credit Suisse Group, and Deutsche Bank) now dominate the nation's corporate-lending scene. That can be bad news for entrepreneurs whose companies don't match the guidelines of formula-bound, bureaucracy-driven large financial institutions. "There are clearly signs of problems," comments Jeffrey S. Levine, a certified public accountant whose firm, Alkon & Levine PC, is based in Newton, Mass. "A client of mine, who owns a very fast-growing temporary-personnel company, suddenly experienced a significant slowdown in payments from a few of his largest customers. Meanwhile, he had a huge payroll that was coming due. So he called me and said, 'I need you to fax over our financials to my bank' -- assuming that it would just increase his credit line, since he had always been such a good customer."
But the bank's response was, It's going to take us a few weeks to decide. Notes Levine, "In an environment like this one, even if a bank is willing to back you, it's going to move slowly and cautiously."
Larry Simon's experience at Interserv was eye-opening. The company had been a model customer at a large bank, with a $250,000 line of credit that it hadn't touched for seven or eight years, according to Simon. But its high-end product line, with each piece of equipment retailing at prices from $650,000 to $3 million, was expensive to produce. So Simon was convinced that he needed as much as $500,000 in credit to finance the company's diversified-growth strategy.
None of the big banks that he approached -- including his longtime lender -- would bite. "My bank was willing to keep us at that quarter-million-dollar limit, but that wasn't enough to accomplish our goals. When I think about the millions of dollars that I ran through that bank over the years through our checking and savings accounts!" he exclaims.
Fortunately, Simon's story has a happy ending. He switched his entire credit line to a young regional business lender, Crown Bank, which was willing to up his limit to the $500,000 he needed. Crown's president, Peter Dahl, explains that a community bank can "look beyond the numbers alone and focus on other issues that are actually very important. Things like a borrower's character. His or her ability to weather a downturn." Dahl adds: "That's why, if we were looking at a company with a longer track record, we might ask more questions about how the business handled the slowdown of '91 than how it performed during a single quarter in '99. With a younger company, we'd be interested in how the company has changed its business plan in the last 12 to 18 months to respond to toughening conditions."
It's ironic. During the boom years of the 1990s, when many large lenders were aggressively pursuing promising entrepreneurial customers, it made sense for fast-growing companies to upgrade their lending relationships. That way, they didn't bump up against credit limits from banks that might be too small to keep up with their accelerated, capital-intensive plans.
But now that the playing field has changed, it's time to consider a different strategy: focus on community banks and business-only banks whose lending priorities will ensure their continued interest in backing small and midsize companies. Stick close to home, so that it's possible -- in fact, essential -- to develop a personal relationship with your loan officer and other key bank employees.
And above all, look for ways to communicate more with your local bank so that it will maintain its faith in you and your business no matter what's going on in the economy at large. You'll probably find plenty of interested listeners. A recent survey by financial-services firm Grant Thornton found that 73% of community bankers reported that serving the small-business market was essential to their growth strategies.
Sticking close to home on the banking front is a strategy that Donna McGovern, a financial consultant and owner of Custom Business Results Inc., based in Huntington Beach, Calif., recommends to her clients in all economic environments. "When I worked as a comptroller myself, I had really good luck with community banks, even in cases when larger lenders weren't interested in considering us for financing. Often the best kind of match that an entrepreneur can find is a growth-oriented young bank that wants to find clients who can grow along with it."
All that isn't to say, of course, that only a small local lender can satisfy a growing company. There are times when even the biggest of banks manages to retain that invaluable community touch. For Jeff Austin, president and chief operating officer of Austin Travel Corp., a 225-employee chain of travel agencies based in Melville, N.Y., his 10-year-long relationship with his bank's loan officers has survived several rounds of bank mergers. "Our bank is now called Chase, but the truth is, my relationship is every bit as close with our bank officers as it ever has been," he confides. "We're always bumping into our bankers at local community functions, and we sit on committees together at different local business organizations. That helps us maintain a close set of informal relationships as well as the formal ones."
In Austin's case, those ties have paid off. "You practically can't pick up a newspaper or magazine without reading about the impending collapse of the travel-agency industry. It's not true. But one reason our bank knows it's not true is because we've been able to spend so much time educating the people connected with our account about what's really going on and where the opportunities lie for our company, regardless of the downturn in the economy or changes in our industry," he says.
If you can't create that kind of relationship with a large banker -- or even get one to return your telephone calls -- then consider approaching a community bank. (See "Finding a Community Bank," below.) But be prepared for initial dealings that won't differ much from those with a larger lender. "You'll still need to make the approach by talking about what kind of financing you need and why you need it, and you'll still have to provide the same basic financial reports and projections," explains Jerry Felicelli, a principal at Larson, Allen, Weishair & Co. LLP, a Minneapolis-based accounting and consulting firm.
"Where you'll begin to see a difference," Felicelli adds, "is in the amount of time that a community banker may be willing to spend with you as a possible loan candidate. These types of bankers will also be more likely to act proactively by suggesting a range of alternative solutions if you don't have all the information they need or your company doesn't automatically present itself with a loan profile."
One final tip: as tempting as it might seem to say yes to any banker who offers you the time of day (along with a credit line), it pays to be cautious. Donna McGovern urges all her clients to investigate small or local bankers as carefully as they themselves are scrutinized by the banks. "You don't want to be caught with a lender that goes into default or one that suddenly and frantically needs to call in all loans because its financial situation is so precarious," she notes. "Remember, banking is a two-way street."
Thanks to local and business-oriented lenders, however, at least it's not a dead end.
Jill Andresky Fraser is Inc. 's finance editor.
Finding a Community Bank
If you're interested in pursuing a community banker, don't wait to run into the right person at your child's next Little League game. You'll be able to fine-tune your search for local lenders by visiting the Web site of the Independent Community Bankers of America ( www.icba.org), which permits visitors to conduct free online searches tailored to their state, city, or even zip code. You can also call the ICBA's consumer-information division at 888-500-5538.
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