Story by Susan Fotovich McCabe
A good idea, savvy marketing and a little intestinal fortitude might help get a business off the ground—or keep it going. But as any business owner and professional knows, a solid banking relationship is critical in fueling the growth and sustainability of a business well into the future.
In business, the relationship between lender and borrower remains a constant, as business needs evolve over time. Regardless of a company’s size or longevity, there’s no telling when it might need to tap into a working capital line of credit, construction or real estate financing or a development loan.
Working as partners, lenders and borrowers ultimately share the same vision for a company’s success, as well as the same concerns over decisions that could lead to financial setbacks. However, given the economic uncertainty of recent years, some companies might wonder if a successful partnership is possible. But Kansas City bankers say they welcome the opportunity to support new and existing companies of all types and sizes.
“It’s a better time to borrow than any time I’ve seen in the last 25 years because interest rates are very low, banks are flush with deposits, and loan-to-deposit ratios are down,” says Kevin Barth, president of 147-year-old Commerce Bank. “In June of 2008, our loan-to-deposit ratio was at 93 percent. Now, it’s at 60 percent (due to lack of demand) and we’re eager to get it back up. Those of us who stayed disciplined and consistent during the economic downturn are eager and aggressive to build that ratio back up.”
The Right Fit
As if starting or operating a business isn’t difficult enough, there’s the added task of finding the right bank to meet a company’s needs. Such considerations—whether or not the bank can handle the amount of the loan, how quickly it can process it, interest rates and how well it understands the company and its vision—are all important factors when a business selects a banking partner.
Former Kansas City radio broadcaster Bob Benish launched his young, niche bakery with just one product, Bob’s Biscotti, which today is sold in retail settings nationwide, including Nordstrom Café and Dean & Deluca. Undaunted by the challenge of having started the bakery the exact month the recession began in December 2007, Benish managed to operate for nearly two years before pursuing a loan.
“Six months in, I started seeing people pull back on luxury spending,” Benish says. “Eighteen months in, you realize that your two-legged business model needs to be three-legged. A small loan made sense for me. The first bank I went to was very upbeat but ultimately unresponsive. Let’s just say that what I was told would happen didn’t happen. So I made a blind call to Country Club Bank and they said, ‘Let’s take a look at what you’ve got.’”
Like Benish, Pro Athlete CEO Scott Hedrick had always been happy with his small bank and even acquired two loans to expand its 20,000-square-foot facility by an additional 30,000 square feet and finish 8,000 square feet of that into office space. Headquartered in North Kansas City, Pro Athlete began as a local sporting goods store, later converting to a national online retailer of bats and gloves. In fact, Pro Athlete is the largest online dealer of bats and gloves in the nation.
Now in its twenty-fifth year, Pro Athlete had no problem qualifying for the loan, thanks to its solid financial history and projections for the future, Hedrick says. But the process dragged on much longer than expected because the bank couldn’t handle the full amount on its own.
Instead, Pro Athlete’s bank had to participate the loan with a network of other small banks.
The delay impacted Pro Athlete’s ability to move forward with its growth and building expansion. After the experience, Hedrick says the company began looking for a new bank that could respond in a more timely manner to its future needs.
“We had a good relationship with our previous bank and we had no trouble qualifying for the loans, but they just didn’t have enough money on their own,” Hedrick says. “A year ago, our CFO selected three banks for us to interview, and we chose Commerce Bank because they allowed us to grow from a small company to a medium-sized company, gave us more banking options and cut our rate in half, saving us several hundred thousands of dollars. We weren’t even shopping rates. We just wanted someone to grow with us.”
Longtime chocolates and candy manufacturer Russell Stover has been in business since 1923 and continues to thrive around the globe in good times and bad, thanks to its success in creating an “affordable luxury” for consumers, says Russell Stover CFO Dave Shapland. Shapland says Russell Stover has several banking relationships, including Commerce Bank.
Most of its revolving line of credit with Commerce Bank is in place to meet the company’s working capital needs, such as managing its own inventory levels to satisfy customer shipments and orders.
With multiple banking relationships, Russell Stover has a very clear set of requirements from such partnerships.
“One of the things we look for is unimpeachable integrity,” Shapland says. “For example, how did they handle themselves during the recession in 2008 and 2009? How much effort do they take in understanding our business model, culture, values and seasonality of the business?”
Shapland adds that Russell Stover looks for a banking partner that listens effectively to the company’s needs and can translate that into a solution. And while most banks do the questioning, Russell Stover asks its share of questions, seeking a candid appraisal of what the bank thinks is its strengths.
“Finally, our banking partner must provide reliable service at an appropriate cost,” Shapland says. “If they push all these buttons—and they have—that’s what’s required for us to maintain a long-term relationship.”
Banks, too, might not feel an applicant is a good fit. Commerce Bank, according to Barth, will work with just about every industry except casinos (and declined further comment).
There was a time, too, when Commerce limited its base of residential construction customers, due to the mortgage crisis a few years ago.
“The market was overbuilt and the affordability index was out of line for the average income,” Barth says. “So, for many banks, lending for residential construction/contractors and development probably isn’t as good now. However, Commerce is still active in that market because we tried to stay disciplined with our customers. We don’t just always say yes to everything. We’re partners with our customers. However, in the last few months, we’ve been adding more residential development loan customers.”
Similarly, Central Bank of Kansas City must find the right fit to serve the interests of the family-owned bank. In fact, though Central Bank of Kansas City President and CEO Bill Dana says his bank has been making commercial loans for 50 years, he admits the climate has changed, making it more difficult for startups, in particular, to qualify for loans.
“It’s a very different time today, due to the economy,” Dana says. “To be a good fit, a business owner has to be on the leading edge of a product or service, not the bleeding edge.”
Not surprisingly, a poor economy often produces a number of entrepreneurs who are attempting to rebound from layoffs and turn passions into paychecks. Unfortunately, many times, it doesn’t work out.
“People love their hobbies and often think they can translate those into businesses,” Dana says. “Whether it’s crocheting knit caps or running model trains, they think everyone likes it. Or they say, ‘I love to eat, so I’ll open a restaurant,’ which has the highest percentage of failure.”
SOME EXPLAINING TO DO
When assessing a company’s capacity to service a loan, banks typically review four to five years of a company’s payment history on past and present loans, financial statements and a business plan. For startups, banks look carefully at personal credit histories, a business plan and whether or not the borrower has any of his or her own capital to put toward the business. Lenders also scrutinize the expenses involved in operating the business, whether or not there is enough capital to make payroll, collateral and revenue projections.
“If a company or individual has a checkered history [good and bad years], they need to be able to explain it,” says Linda Cole, executive vice president of Country Club Bank in Kansas City. “In today’s economy, companies don’t have a string of profits like they used to. So one of the things bankers want to know is what the individual has done to right the ship. That’s the big difference. As long as you have a good story, you can get money.”
However, banks spend as much time, if not more, scrutinizing intangibles, including how a business owner or professional conducts him or herself in one-on-one interviews with the loan officer, how successfully they can communicate their vision of the company during those interviews and even (in the case of an existing business) how clean and organized the business appears during an on-site visit.
“We look at character, collateral and capacity—that is, cash flow and whether you can service the debt,” Dana says. “Lenders have a gut feeling and use ‘belief’ factors, based on the integrity of the owner. For example, a company today won’t do too well if it’s selling buggy whips.”
Mike Maddox, president and CEO of privately held CrossFirst Bank in Leawood, agrees. Acknowledging that every commercial business loan is different, Maddox describes the process as “an art, not a science.”
“Of course, we look at equity, cash flow and history, but a lot of it is a gut feel,” Maddox says. “Banks also have to feel good about how the loan will be used. We’re taking a lot of risk for a relatively small return.”
Gut feelings can’t be ignored, according to Barth, who says so much of a bank’s decision making comes down to its assessment of the company’s “critical thinking skills.” After a while, he says, lenders become quite good at knowing whether a company has the management expertise and business capacity to pay back a loan.
“We ask, ‘What kinds of things keep you up at night?’” Barth says. “It’s a good indication that they have good critical thinking skills when they can tell you, ‘Here are the risks and here’s how we plan to mitigate them.’”
Bill Gordon, president of Signature Landscape, was thrilled when Commerce Bank decided to take a risk and give him a loan for his commercial landscape firm.
Gordon started the company in 1989 in his garage. Armed with a degree in horticulture, $5,000 in savings and another $5,000 from his father, Gordon set out to capture contracts from commercial properties around the entire Kansas City area. Last year, the company recorded $12 million in revenue. This year, it will be closer to $15 million, Gordon says.
“In those days, service industries were nothing to write home about,” Gordon says. “Now we have 180 people on the payroll at peak season, and we just acquired a company that allowed us to add commercial snow removal to our list of services.”
Unfortunately, with the unseasonably warm winter during 2011-12, the company had not one “pushable event” all of this year. Now, Signature Landscape is in the thick of its summer season, with a large staff and a 30- to 60-day lag time in accounts receivable. That’s when its line of credit really comes in handy, Gordon says.
“An acquisition can be an effective way of growing your business. Commerce has seen us grow and even hired us to care for some of its properties,” Gordon says.
“They’ve seen us pay back notes many times. Still, we had to provide some detailed information to get the loan. But that’s how it’s supposed to work.”
Road to Financing
“Start with the bank that knows you,” Cole says. “If we know someone, we’ll stretch a little further.”
Do your homework and demonstrate your industry expertise. Banks look at trends when evaluating companies, says Dana. A business owner has to have an enormous base of knowledge about the industry as a whole.
“Some of our best customers have been people who have taken on dirty jobs—scrap metal businesses, specialty contractors—finding a smarter, more intelligent way of doing things,” Barth says.
For smaller companies and startups, Maddox says consider a Small Business Administration (SBA) loan. Companies must meet certain criteria to qualify, including: the business must first be turned down for private financing, it needs to meet lender qualifications and it must meet size requirements based on the government’s definition of a small business for your industry.
For example, most small retail businesses cannot have exceeded $7 million in gross sales averaged over the previous three fiscal years, and most wholesale businesses cannot have more than 100 employees (500 employees for manufacturing businesses).
Having navigated the SBA loan process, Benish says banks ultimately want to be the force that nurtures and sustains new and existing commercial growth in Kansas City.
“I think banks want to know you’re going to work hard, you have prospects and you’ve worked to overcome any problems you’ve encountered and won’t sit on your fanny and hope that your dream is going to come to fruition just by looking pretty,” Benish says.
Benish and Hedrick similarly described their own business loan experiences as somewhat simple and straightforward, their roles being to provide the necessary financial paperwork and meeting with a bank representative to discuss the past, present and future of their respective businesses.
“During the interview, we discussed how our company might expand our product line in the future,” Hedrick says. “I believe you have to have a great banking relationship first before you can think about expanding your product line.”
The banking climate has changed in the past few years, and banks have learned tough lessons. Yet, Kansas City remains a great place to start a new business or help an existing company continue to thrive.
“Banks got into trouble for loaning more money than they should have, whether those loans were for individuals or businesses,” Barth says. “The money we lend is not our money. Part of our job is to help our customers grow and to pass on what we’ve learned in working with other companies during their ups and downs over the years.”
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