by Chris Casacchia Phoenix Business Journal Friday, April 23, 2010
Despite owning a successful luminary business and having a $120,000 purchase order in hand from three major retailers, John Norberg couldn’t secure a loan from M&I or Chase banks.
Russ Perry’s young marketing and advertising firm has avoided debt and weathered a storm that rocked his industry, yet Wells Fargo bankers quickly told him he wouldn’t qualify for a line of credit.
It’s a common story for thousands of small-business owners in the Valley who continue to have loans rejected by banks, which sparks the question: What do we have to do to get a loan?
“You need to know what the bank needs to know before they need to know it,” said Scott Mahoney, managing partner of Catalyst Corporate Solutions in Peoria.
Mahoney has spent more than a decade in the financial services industry, including stints as a commercial banker at JPMorgan Chase & Co. and KeyBank’s Technology Investment Banking Group. Now, he’s advising businesses on how to land financing in a difficult environment.
Cash always has been king, but it’s never been more important than now.
“Cash flow, that’s paramount,” said Glenn Gray, CEO of Sunwest Bank, which took over First State Bank in Flagstaff after the Federal Deposit Insurance Corp. shut it down in September.
But that’s only one of the criteria his bank assesses before granting a loan.
He advises business owners to have high-quality financial reports prepared by an accountant — even better, audited by a certified public accountant. Important factors include inventory, quality of receivables and their turnaround time, and current assets.
On the liability side, Gray wants to know whether companies are accounting correctly for their payables and accruing their expenses and cost of goods sold properly. He also wants to examine year-over-year trends and what’s driving revenue.
When a potential borrower doesn’t want to supply tax returns or reports a discrepancy between company financials and tax statements, that’s a big red flag, Gray said.
“We are certainly putting more credence on quality financials,” he said.
Jeff Kunkel, a senior vice president and West region manager of Chase, lists cash flow, liquidity and capital position among his highest priorities. But he also wants to know how a company has adjusted during the recession, the purpose of the loan, if it has been well-thought-out, and if the right business decisions have been made.
This year, Chase intends to double its lending to $10 billion nationwide and hire 325 business bankers to handle that load. If a loan is rejected, a second team will review it and help the customer find either an in-house solution or another lender.
In 2009, lending was way down at Chase, one of the largest banks in the world. When asked why, Kunkel said demand sank as businesses struggled to survive — a similar refrain among many bankers the Phoenix Business Journal talked to for this story.
“It wasn’t so much we stopped lending. The demand is what came to a screeching halt,” Kunkel said.
Norberg, president of RC Co., said he was turned down for a loan last May because of a lack of business experience. He bought the company two years ago, though it was established in 1984.
Norberg’s accountant drafted a business plan for the $100,000 loan, and he relied on the advice of his wife, a former business banker. But even a $120,000 purchase order from Walgreens, Ace Hardware and True Value wasn’t enough to sway the banks.
Within a few months, he found Performance Funding, a Phoenix factoring company that provides accounts receivable financing. The company provided the loan, and Norberg was able to order the supplies to cover the purchase order, which was more than he borrowed.
“If we wouldn’t have gotten funding from Performance last year, we would be bankrupt today because every penny we had, we put into that company,” Norberg said. “We wouldn’t even be in our house.”
ACCESS TO CAPITAL
Perry gave up looking for a credit line after being discouraged by the process. He was seeking a $10,000 to $20,000 credit line as a precaution, in case he needed to hire a new employee or buy software or hardware.
He was rejected a few days after he applied, which entailed filling out a form with personal and business information.
“There was no guidance after that,” said the founder of Keane Creative in Tempe, which has never posted an annual loss.
Perry had worked with the same banker for years and established business accounts with San Francisco-based Wells. Despite the setback, his company hasn’t switched banks. He likens the idea to leaving the Mafia.
“Since then, I haven’t tried again. I felt like a little fish,” he said. “It is very hard to grow because we can’t get that access to capital.”
Keane Creative: www.keanecreative.com
RC Co.: www.luminarias.com
Wells Fargo: www.wellsfargo.com
JPMorgan Chase & Co.: www.jpmorganchase.com
Sunwest Bank: www.sunwestbank.com
Securing a Business Loan
1. Have your financial statements in order. Lenders want to know the business is making money.
2. Be able to explain how the loan proceeds will be used. Lenders like to know whether the loan proceeds are going to increase cash flow.
3. Make sure the business has enough collateral (e.g., accounts receivable) to justify the line of credit. Collateral are assets offered as a repayment source.
4. Ensure the owners are invested in the company. Lenders are looking for sufficient equity in the company on the part of an owner.
5. Know your local economy and competition. Be prepared to describe the primary threats to the business and what measures are being taken to protect the company from these risks.
1. Lie or overstate items on the application, financial statements or your personal financial statement.
2. Get too small a line of credit. If sales are growing quickly, you may not have enough credit to fill orders.
3. Get just one term sheet. There are plenty of lenders, so find one that understands your business and has a good rate.
4. Stop communicating. Whether it is a cash-flow issue or a business opportunity, talk to your lender. Lenders are proactive and can offer solutions.
5. Bluff. Do not threaten to leave a lending relationship just to get a better deal. The lender may just call your bluff.