Fifth Third Bank on funding rapid growth Featured

8:00pm EDT September 25, 2008

Getting cash is only a part of the challenge in funding a company’s growth.

Perhaps the bigger challenge is using that cash wisely. Banks usually are delighted to offer a business loan to help fund a

company’s growth. However, they expect

the funds to be used wisely and invested


“Cash flow is the most critical piece of

the equation,” says Lori Geier, vice president and market manager of Fifth Third

Bank’s business banking division.

Smart Business asked Geier what kinds

of benchmarks she has for “wise” use of


As a banker, what do you look for when a

company wants money to grow?

Whether the growth plan is for an acquisition, to start a new product line or to

expand into a new market, there are three

things we consider. First, we ask whether

the business has a plan with a vision and a

strategy that are measurable and quantifiable.

Next, does the company have reasonable

projections that show its plan will generate

cash flow? Does it have the staff, machinery and the expertise to support its plan? In

other words, does it have a handle on its

true needs?

Third, is the plan reasonable and attainable? Does management have prior experience in rapid growth situations? What is the

company’s strategy to execute and evaluate

its success as it moves through time?

Of these factors, which is the most critical


Cash flow is the most critical piece. The

company has to understand its cash conversion cycle so it can calculate the true

cost of growth.

A company has to have a plan to maximize its inventory turns so it limits the time

it carries its inventory. Also, it should have

a good handle on the number of days it

takes to convert accounts receivable and

how long it takes to convert assets to cash.

Optimally, we want cash flow that will

allow a business to be able to cover obligations 1.25 times. Or, if we are looking at global cash flow, we want a ratio of about 1.6.

Are there other ratios a company must meet?

That varies by industry segment.

Businesses need to be in touch with what

they earn for every dollar they spend. A

new $10 million contract is not good for

growth if it costs $12 million to implement.

The ratios will be different depending on

the company and its industry, but we commonly look at ratios such as funded debt to

EBITDA, debt to tangible net worth, where

the lower the multiple the better. Working

capital ratios tells us if the company’s

‘engine’ is working. Return on equity

should be important to shareholders as

well as return on assets to show how effective the company utilizes its assets to create value.

How do you determine if a proposal makes


Whether you use bank equity or owner’s

equity, you have to do a solid cash flow forecast. Be your own devil’s advocate.

Write down your cash inflows and out-flows for at least 12 months, month by

month. We actually would prefer to see a

plan that covers three to five years.

The cash flow should show a realistic

picture of salary and benefit requirements,

insurance costs, added capital expenses

and maintenance costs, real estate requirements and additional costs of sales. With

these numbers on paper, you have a good

idea of whether you need a working line

of credit or a loan for capital expenses —

or both.

Are there red flags?

A good business plan will turn up any red

flags. Go over the plan with your financial

advisers, including your banker. Be sure

you leverage assets appropriately. Don’t

borrow with short-term assets over a long

period of time. An interest-only loan for

five years that is secured by accounts

receivable is not prudent. Match short-term credit with short-term assets.

Look at any contracts you are signing to

achieve anticipated growth. You shouldn’t

take a 10-year loan to buy a piece of specialized equipment, which supports a

three-year sales contract. Or, be sure you

are nimble enough to downsize yourself if

you end up carrying a big piece of equipment on the books after the new contract

goes away.

Any final words of advice?

The people component is huge and often

overlooked. Be sure you have the right talent on hand to implement your growth

plans. This includes not only your own

engineers and sales staff but also partners

like your accounting firm. Will they all be

able to go to the next step with you?

Leverage the expertise of your business

advisory team in the planning stages as

well as throughout the execution of your


LORI GEIER is a vice president and market manager in the business banking division of Fifth Third Bank in Cincinnati. Reach her at