Money in the bank Featured

7:13am EDT October 30, 2001
In his 25 years in the business, Allen Alwood has sought his share of financing -- and heard his ration of approvals and denials.

What might surprise you, however, is that he's not discouraged by the rejection.

''I don't mind getting turned down from one or two banks,'' says Alwood, CEO of Virgil Alwood Florist Inc., a nearly 50-employee business with revenue exceeding $2 million. ''It shows me where I have a problem and I need to fix it.''

In fact, he's even shopped around his loan requests before he was quite ready to apply so the denials would help him fix flaws in the business plan of his four-generation family company.

Alwood has sought financing in the past to buy out another floral business, expand his own, get working capital and remodel his buildings. He's obtained various loans ranging from $10,000 to $500,000 from banks such as Huntington National Bank, Key Bank and Heartland Bank.

In the process, he's learned a lot to help him work with his current bank, Bank One. Even so, he's glad he had a head start.

''I have a degree in business administration finance and marketing, which I'll tell you is a salvation,'' Alwood says.

Kim Swanson, a partner with Squire, Sanders & Dempsey LLP who has advised Alwood on some of his bank transactions, says business owners often seek funding from sources other than their bank, such as friends, family members or franchisors. That decision, he maintains, might not always be the best.

''There is a level of independence by getting your financing from the bank rather than from your franchisor or family,'' Swanson says, acknowledging the option might be more expensive at first. Future financing, however, comes easier.

''One thing that's most true is when you show a bank you can pay back your loan, they want to lend you more money,'' he adds.

Alwood, Swanson and Melissa Ingwersen, president of Bank One's Columbus market, share their advice about building a relationship with your banker.

Be prepared

If you're new at seeking financing, do some homework.

Ask around, Alwood says.

''Hypothetically, you're opening a dairy bar. Go to the other side of town and talk to a guy -- not your competitor -- and say, 'How did you get funding?' He may share with you,'' says Alwood, who joined a group of floral industry executives from across the nation to discuss trends in the industry, staffing and financing.

Also ask sources, such as your trade associations, accountant or banker, about special financing programs that might apply to you, Swanson says. You might be eligible for block grant loans, funding available to minority business owners, special financing options for specific areas a city or county wants to develop or bonds for businesses in your industry.

To research your choice of bank, look at its Internet site or ask your accountant or lawyer for advice, says Swanson, who currently represents Bank One.

''You'd prefer to be in the top half of the borrowers of a small bank than the bottom half of a bigger bank,'' Swanson says. ''The more you mean to your bank, the more likely they're going to be willing to cooperate with you during hard times.''

Once you've chosen a bank, you'll likely have a meeting with a commercial lending representative. Bank One, Ingwersen says, generally sends lenders to the business instead of calling a meeting at the bank.

''We, as bankers, really value being out with our clients in their place of business,'' she says, noting it gives them a chance to see how the business works, meet the management team and learn more about the reason the business owner wants the loan.

At the first meeting, she says, the banker generally will want a description of the business: what you do, your key suppliers, your competitive advantage, for example. Bank One also generally requests three years of annual financial statements to understand how the owner does business from year to year.

Don't worry, Ingwersen says, if you don't have everything bankers request at the first meeting; just be willing to get it for them later.

They'll also need an explanation of why you want the money, of course.

''You can't build a blue sky: If I do this, millions of people are going to come into my store,'' Alwood says. ''You've got to be realistic.''

Do the math

Being realistic, however, doesn't mean you need to have your request figured out to the penny.

''A range is a good starting point,'' Ingwersen says.

Alwood points out there are many factors to consider when figuring out how much money you'd like to request in a loan or line of credit. Say, for example, you're adding on to your building or constructing a new one. You'll have to:

* Define the project, including hard costs, such as the materials and labor; soft costs, including business permits and other paperwork for which you may need the help of an attorney; and contingency costs -- in case something goes wrong.

* Make a comparison between your current and expected expenses. For example, if you're currently renting but plan to use your loan to buy a building, you'll credit your current rent amount toward your new debt.

* Look at the short-term effects. If you're in retail, will an expansion project adversely affect sales during construction? If you're moving, what will it cost to advertise to let your customers know about your new location? If the new location has better traffic, what's the potential of better sales?

* Point out any oddities in your financial reports. Alwood calls them ''add-backs,'' or unusual expenses that occurred in the previous year that won't happen again. For example, you may have paid cash for a new piece of machinery you expect will last 10 years.

You don't have to prepare your request by yourself.

''I strongly recommend that small businesses have an outside accountant,'' Swanson says, adding the outsider also gives a banker some level of comfort that someone other than the owner of the business put the numbers together. ''It makes your business look more professional and makes the banker think, 'These people are moving to the next level.'''

Choose an accountant who has counseled other businesses in your industry or of similar size so he or she can share experiences others have learned from.

Once you've given your information to the banker, he or she will likely return to you with a proposal. Keep an open mind, Ingwersen says, pointing out that a good banker shouldn't just take your request and say, 'Yes' or 'No.'

''Our bankers are highly trained to do a lot of financial modeling,'' she says, noting that the banker may return and suggest something else, like a different loan amount, term or form of financing.

''That's where a bank adds value,'' she says. ''We're not order-takers.''

On the flip side, don't be shy if there's something you don't understand.

''A good banker should be an adviser, just as a good accountant and a good attorney,'' Ingwersen says. ''A good banker should be providing solutions on a whole myriad of financial situations, from commercial to personal -- and people should expect that from their bankers.''

Build trust

Obviously, one of the best ways to improve your relationship with your banker is to pay your bill on time.

But it's actually more complicated than that, Alwood, Ingwersen and Swanson point out.

''Bankers are human beings, too,'' Swanson says, adding that the banker often receives bonuses based on how many loans he or she makes. ''In many cases, he really wants to make a loan, so he's looking for evidence to take to his superiors (to approve the loan).''

One sure way to build trust is to show the banker you're willing to take some risk on your project.

Alwood says since he has a labor-intensive business, he's got no equipment to put up as collateral. He also does most business on credit, so he doesn't have a lot of accounts receivables.

''I don't have a lot for the bank to come in and say, 'I feel comfortable; I can put my hands on this,''' Alwood says. ''Until we were able to put real estate under our bottoms, we were frustrated dealing with banks because they couldn't see past the fact that we didn't have assets,'' Alwood says, adding that the situation has become easier because his company now has real estate -- facilities on Bethel Road and in Reynoldsburg.

The early days, however, forced him to find other ways to show a bank he was dedicated to his projects. For example, he's borrowed against deposits, such as certificates of deposit. He's also borrowed against payments he owes to a vendor, an option that requires trust on the part of both parties. If you have a vendor to whom you pay $50,000 a month, he says, you might ask whether you could pay it back over a 12-month period to free up some cash for you for another project.

And when he bought a building, he asked the previous owner to take some of the financing; the deal ended up being 10 percent cash from Alwood, 45 percent financing from the bank and 45 percent financing from the previous owner.

''My approach has always been you've got to have earnest money,'' Alwood says. ''The bank -- and whatever lending institution you're looking at -- doesn't want to feel they're the only person with risk.''

Don't forget that the bank also wants to increase its own business.

For example, very large corporate clients, such as those with more than $500 million in sales, likely have multiple banking relationships, Ingwersen says.

''Within that group, they need to be having discussions with their bankers on what their bankers' expectations are for a return on the relationship,'' she says. ''Those customers probably should be looking at the services that they purchase from financial service companies -- anything from investment management to pensions to treasury management -- and considering whether they are rewarding the banks that participate in their credit with an opportunity to bid on the noncredit aspects of their financial package.''

Tell the truth

Be honest with your banker -- even if you think it will hurt your chances of getting or keeping a loan. You might be wrong.

''We actually do finance people who have losses -- not sustained losses, obviously -- but we absolutely understand the concept of a bad year or a transition year,'' Ingwersen says.

If you have bad news, make sure your banker hears it from you first.

''If you've got problems, go and tell the banker you've got problems,'' Swanson says. ''Probably, he will work with you.''

The banker might restructure your loan in a way to keep it current or allow you to delay a payment. Lying or covering up information, on the other hand, thwarts your chances of cooperation.

''If it appears a business owner is hiding information, intentionally or not, that's not the basis for any relationship, whether it's personal or professional,'' Ingwersen says.

In the end, both sides of the relationship should be perfectly clear and open.

''There shouldn't be any magic or mystery about how we make our decisions,'' Ingwersen says. ''A banker should be able to give them counsel, and a client should be able to ask questions.''

Don't have preconceived notions about a bank or what financing you might receive, Ingwersen adds, as each situation is different.

''I can't cookie-cutter my solutions, because it's not appropriate. Just like not everybody wears the same shoe,'' she says. ''It's the reality of our business.

''If I understand your business as a banker, then I can be much better assured of getting that size 9 orange shoe that fits you perfectly as opposed to the black wing tip, size 7 that doesn't work.'' How to reach: Allen Alwood, Virgil Alwood Florist Inc., 552-1624 or valwoodflorist@aol.com; Melissa Ingwersen, Bank One, 248-5471 or melissa_ingwersen@bankone.com; Kim Swanson, Squire, Sanders & Dempsey, 365-2700 or kswanson@ssd.com

Joan Slattery Wall (jwall@sbnnet.com) is senior editor of SBN Magazine in Columbus.