Finding a bank for your business is different than applying for a car loan. Instead of just needing a source of capital, you also need a partner that can help your business grow.

“You’re looking for a relationship that will allow your business to prosper,” says Andrew M. Phillips, vice president, relationship manager at Bridge Bank.

Smart Business spoke with Phillips about how to find the right bank for your business.

How does an owner find a bank that fits his or her business?

First, look for a bank that is truly dedicated to serving businesses. Long lines for tellers and heavy branch traffic may indicate that bank caters to personal accounts. A true business bank will likely have a lobby that’s much more open, with employees sitting at desks rather than behind teller windows. There’s less activity there because most business is conducted out in the field, at client offices or job sites.

Another consideration is size. If you need to borrow $500 million, your choices are going to be limited to big banks. But if you’re a small to midsize business you should look for a smaller bank that shares the same vision and spirit as you.

If a bank has the capacity to lend $500 million, it can certainly take care of your $2 million loan request, for example. But you’re going to be a small fish in a big pond, and you probably won’t get the service that you need for your company. That same $2 million loan is very important to a small to midsize bank, as will be your relationship.

What are the advantages smaller banks can provide?

Do you want to shape your company to fit lending requirements and other parameters of a big bank, or do you want a bank that shapes its requirements to fit your company? By virtue of their size, certain smaller banks can be more adaptable to the unique needs of the businesses they serve. They can be more flexible and offer solutions customized to fit individual businesses instead of broad-brush, pre-packaged solutions to fit a particular business sector, for example.

Every bank will say they have expertise in your industry. But don’t let this be a substitute for a banker taking the time to learn your particular business, which isn’t exactly the same as your competitor’s. The right bank can do a lot to help you maintain the edge that helps you thrive.

A smaller bank doesn’t have a prepackaged program that says, ‘You’re a distribution company that has $10 million in annual revenue, so you need a $2 million receivables line of credit and up to $1 million of term debt.’

They look at each client, how they do business, and determine what advantages can be provided that fit into their way of doing business. For example, can they take discounts from vendors that they aren’t taking? Do they need to finance a piece of equipment at a shorter or longer term?

Once you’ve decided the right size of bank, how do you choose one?

Talk to business colleagues about their experience and find a few banks that make sense and are a good fit for your business. Some banks do have expertise in certain industries and if you have one that’s particularly good with yours, start there.

Then, meet with a few bankers and get to know them. It’s not enough to send a package and see how your needs fit with the bank on paper. You need to discuss your company’s history — where it has been, where it is now and where it will be in the future. It’s important to provide your financial history, but it’s just as important to outline what and where your company is, its goals, and the ambitions and desires of the people running it.

That will help to ensure a good fit. People have different priorities, and a bank needs to know those priorities to put together a customized solution.
It takes a lot of time to do this process properly, but a good banking relationship is worth the effort.

Andrew M. Phillips is vice president, relationship manager, at Bridge Bank. Reach him at (408) 556-6575 or

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Published in Northern California

Much of the country is still recovering from the recession, making it difficult for companies to secure financing. Northern California, however, is an exception.

“It’s definitely a bifurcated market right now. The environment for financing is very robust here in Silicon Valley and other tech hubs,” says Kelly Cook, senior vice president and market manager at Bridge Bank. “If you read the Wall Street Journal or the Economist, they say banks are still not really lending. That’s not the case here.”

Smart Business spoke with Cook about the financing environment and methods available for companies to get funding.

Why is the financing environment good locally? Is it the market or the technology industry that’s here?

In the Bay Area, the unemployment rate is low, even for nontech companies. There’s a ripple effect — a lot of nontech companies service the tech industry.

There is a large amount of new capital available from all different investment sources from corporate venture arms, to traditional venture capitalists, to the angel groups that are forming, as well as private equity and hedge funds getting back into the tech financing market. All of that is rippling through the local economy and job market.

When does equity financing make sense?

Equity financing is readily available for entrepreneurs and management teams that have a good track record and offer a new technology or new way to address a big problem in a big market. In the earliest stages of a company, equity financing is the way to go. The decision is about what type of equity to raise.

Options include sweat equity — using the founder’s money and/or knowledge, raising money from friends and family, or angel investors. If you are far enough along in terms of product and initial customers, you may attract institutional equity financing.

There are various theories/approaches on how much ownership stake to give up for that equity. Savvy entrepreneurs know how to raise just enough to reach the next value-creating milestone. Once a company generates annual revenues approaching several million dollars, more choices will open up on the debt financing side.

Do you have to show consistent profitability before banks will offer debt financing?

A lot of entrepreneurs, CEOs and CFOs don’t think they can raise bank debt financing when the company is still cash-flow negative, but that’s not the case. A true technology-focused lending group has a number of solutions including working capital lines of credit, which are underwritten based on the strength of a company’s accounts receivable. There also are invoice-specific financing structures, asset-based lines, and traditional, revolving, borrowing-based lines of credit.

How do you determine what form of debt financing is right for your business?

That’s a consultative discussion among a company and its finance partners. If a company has revenue and cash tied up in the accounts receivable cycle, it should consider a working capital line of credit such as a line tied to specific invoices or a collection of invoices. With regards to a more permanent source of debt financing, a potential lender will look at your business plan and determine whether it can support typical financial covenants and a term debt structure. If so, then typically that’s the least expensive form of term debt financing.

But if a company’s forecast won’t support covenants, or you don’t want to be burdened by managing covenants because there’s too much uncertainty, then a venture debt structure makes the most sense.

Banks also can be used in conjunction with other financing partners. Banks are regulated entities, and are limited in terms of providing venture debt. But they can participate with a venture debt provider and combine that with a working capital line of credit from the bank. That combination can be a powerful solution because it gives short-term financing at a low cost and flexible term debt that extends cash runway to allow a company to execute its business plan.

There are flexible, customized solutions for each company, but it takes some digging into the plan, market and financial history. A good lender will conduct a diligent underwriting process to determine pricing and structure that meets a client’s needs.

Kelly Cook is a senior vice president and market manager at Bridge Bank. Reach him at (650) 462-8513 or

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Published in Northern California

It’s important to know the desired outcome before entering into a marketing program, says Ryan Barringer, senior vice president of marketing and brand strategy at Bridge Bank.

“Too often a manager invests in a campaign without having first identified the appropriate criteria to evaluate its performance. The output might be obvious — a TV spot, a sponsorship, or a viral video aimed at delivering impressions. The question then becomes, ‘What is the outcome of those impressions and how will they affect revenue, if at all?’” Barringer says.

Smart Business spoke with Barringer about ways to determine if marketing campaigns meet goals and the differences in marketing to businesses as opposed to consumers.

What are the desired outcomes of typical marketing programs?

With any campaign, the ultimate goal is to somehow match the benefits of your product or service with an interested buyer who is willing to pay for those benefits. But there are different paths toward that goal. The marketing effort could be about educating the audience about a product feature, or simply to build awareness of a new or unknown brand. Or maybe the goal is to enhance the credibility of a brand by association with another well-known brand, thereby leveraging the equity of a complementary brand.

These goals all help enable an eventual sale, but the ultimate measurement of them is not necessarily the sale itself — it could be an increase in awareness or trust in the brand, or visits to your website.

Do you determine what would increase sales, and design a campaign to reach that goal?

The marketer or business owner should put themselves in the buyer’s shoes, maybe sit down with a customer and learn about the journey they took in making a purchase. Tracing the steps to a sale helps in figuring out where you can have an influence.

Also, there are nuances depending on your sector; business to business marketing is a bit different than consumer marketing in that purchases are usually at higher price points — you’re selling servers, buildings or vehicles as opposed to meals or sundries, so the risks of a poor buying decision are different — and there is usually more than one buyer that needs to be educated. It’s not just me making a purchase on behalf of my company, my manager is also involved.

That makes the role of brand more important — the old adage that no one was ever fired for buying IBM computer equipment. IBM had done great work building trust and credibility in its brand, thereby making it easier (and safer) to buy their products.

So how is the effectiveness of a marketing program measured?

It depends. Some say that sales might be the ultimate metric, but that obscures other important drivers like corporate reputation or convenience. It’s up to the buyer of a campaign to decide the metrics, which may or may not come at a cost. Marketing research can reveal answers to goals, such as whether the audience has a better understanding of your product, or increased awareness or perceived value of your brand. An initial survey can create a baseline to measure against to determine if the campaign had an impact. Digital campaigns are far easier to analyze, and can offer many different opportunities to sustain engagement with a potential customer.

Where do businesses make mistakes with marketing efforts?

One is not understanding what a campaign will deliver. As mentioned, it’s not always about revenue; it could be awareness or increasing the attractiveness of the brand, or even correcting a misconception.

Business owners often overlook the importance of things such as the use of modern graphic design. If you’re presenting an outdated visual representation of your company or offering, that could actually create suspicion among buyers that your business might be outdated or irrelevant.

Buyers consume information differently and it’s important to reach them through the proper channel, whether it’s a video, website or social media. Technologies are changing ways consumers enter into that buyer’s journey. If you’re not attuned to those changes, you’re going to miss out on an opportunity because your competitors will beat you to the punch.

Ryan Barringer is senior vice president of marketing and brand strategy at Bridge Bank. Reach him at (408) 556-8677 or

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Published in Northern California

After a couple of years sitting stagnant at 3.25 percent, the prime interest rate is expected to go up in 2014, making this a good time to secure a business loan.

“There’s not a lot of inflationary pressure yet. The Federal Reserve has been signaling a desire to come off of quantitative easing, and they’ve been trying to set the market up for rate increases. But every time it’s mentioned, the stock market drops 100 points,” says Michael Hengl, senior vice president and group manager of Corporate Banking at Bridge Bank.

Eventually the expectation of higher interest rates will be set to the extent that the impact to the stock market will not be that great, and the rates will go up, Hengl says.

Smart Business spoke with Hengl about the state of the commercial banking industry and what’s in store for 2014.

How substantial will interest rate increases be in 2014?

Rates will start easing in the second half of 2014, but we’re not going to see big jumps.

Some sectors of the economy are doing very well. The Bay Area is dominated by technology companies that are going gangbusters right now. The energy industry is doing very well in places like Texas and North Dakota. However, there are still elements of the economy that are struggling.

That’s what makes it a good time for a small or midsize business to get a commercial loan. Right now, there is a lot of liquidity in the banking system, and banks want to make those loans. There just is not enough demand.

Is that because businesses are reluctant to increase debt?

Business managers are being very cautious. When it comes to hiring, they are taking it to the point where they’re maximizing the people they have on hand. Or if they’re buying equipment, it’s all replacement items. There’s been a decent amount of equipment financing, but it’s for capital expenditures that companies deferred in 2009, 2010 and 2011. They’re catching up with those needs.

Businesses are not buying equipment for expansion; when that happens, that’s when interest rates will start climbing.

Will anticipation of interest rate increases spur activity early in 2014?

Many commercial loans are variable-rate, so they’re much less rate sensitive. If you need a line of credit for inventory, you get the loan. However, equipment loans may have fixed rates, which you want to get at the lowest possible rate, and there have been more commercial real estate acquisitions.

One deal earlier this year was done solely because long-term rates were creeping up. Back in early summer, there was a big jump in mortgage rates.

Other than rate, are there advantages to getting a loan now?

Sure — when a company approaches a bank for a loan, they’re going to find the bank very receptive. Still, there were lessons learned from the financial crisis, and banks will exercise additional due diligence. That’s an advantage to business owners because it improves communication between the bank and the borrower, which is the cornerstone of a banking relationship.

A good example of how businesses can be helped by this process involved a company in the food industry, which had strong growth, but profits were lagging due to a manufacturing operation overseas. It couldn’t close the facility because of the impact on liquidity, and an operating line of credit was needed to fuel growth. By understanding this, a bank could cover the short-term need, knowing the company would recapture that over the long term.

That’s why it’s important for a company to sit down with its bank, go through the due diligence process and not be frustrated if it’s more work than it was five years ago.

In another case, a client bought a much larger company, a risky proposition. The company had a strong set of projections and acquisition plan, which was actually strengthened by the bank’s due diligence process. Now, the bank’s comfortable with the deal, and the company has a better business plan in place.

The bottom line is that it’s important to be proactive in communications with your banker, so the bank can react quickly when you need help. Ultimately that good relationship should help mitigate risk for both parties.

Michael Hengl is a senior vice president and group manager of Corporate Banking at Bridge Bank. Reach him at (925) 249-4901 or

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Published in Northern California

The Check 21 Act, passed in 2003, had a dramatic impact on businesses’ cash flow by allowing banks to send digital versions of checks — eliminating the need for physical copies. Similarly, important developments are on the horizon to further enhance payment capabilities, says Tom Hoffman, senior vice president and manager of the Treasury Management Services Division at Bridge Bank.

“We’re seeing a lot of start-up technology companies focused on creating better ways to process payments, and adapters to allow accounting systems to interact with bank services,” Hoffman says.

Smart Business spoke to Hoffman about methods to help manage cash flow and services that may be available in the future.

How can a business tell what treasury management services might be needed?

A good banking partner should conduct initial assessments when clients start working with the bank, and also meet with clients on a regular basis to review needs.

For example, a growing business wanted to see if any changes could impact its treasury management needs. It had acquired a health insurance business in Southern California that processes COBRA payments, and payments were being mailed to central accounting at the company’s headquarters in Northern California. That’s a slow process. The business was able to set up a remote deposit capture (RDC) scanner to process checks electronically. There also are fields in the RDC platform for record keeping — for a payment of $100, the insurance company is paid $95 and $5 is kept for processing. Deposits are now made immediately, which speeds up cash flow and improves the flow of transaction data to the accounting system.

It’s a good idea to meet with your bank’s treasury management adviser at least annually to review your account. Look over the fees you’re paying, determine whether the services are worth the cost and see if there are other services you could be using.

Do businesses often pay for services that aren’t utilized?

It happens all of the time. There might be a base charge for Automated Clearing House (ACH) service and no activity. Maybe the business thought it was necessary, not realizing that if you’re not the party originating the ACH transaction, you don’t need the service. That can be confusing to many people. One of the benefits of treasury management consultation is that your bank should catch these oversights and alert you to save your business money.

How can business owners benefit from new solutions on the horizon?

Many start-up technology companies are working on adapters to create better ways to use existing payment rails such as the check clearing system, ACH, ATMs, and debit and credit cards. If you’re overseas, you can use your ATM card at a bank in London; so, why can’t you send a payment to an international vendor through this network and have an immediate settlement?

Technically, it can be done, but there are a lot of issues — international transfers are done through the Office of Foreign Assets Control. However with such efficiency, those things will be addressed. It can take two to four days to send a wire transfer internationally. It would be attractive to deliver a system to settle that immediately.

In terms of treasury management, the next step is to integrate enterprise resource planning systems with banking services. That’s already happening at Fortune 500 companies. The future is finding technology to create adapters that will connect the company’s banking services with its accounting platform. Businesses will be able to evaluate cash needs and reconcile the accounting system on a daily basis, rather than waiting for paper statements. It’s just a matter of creating an interface with whatever accounting software is being used.

One start-up company has a platform to upload accounts payable — all of the invoices a business receives — so payments can be reviewed and approved via tablet. CFOs want the ability to see every invoice and approve payment, even when traveling.

We’re going to see a lot of innovation. It might not be as dynamic as a new payment system, just modifying the ways existing systems are used to make cash flow more streamlined and free up working capital. Check 21 was a good example of that, and the efficiency, economic and environmental gains were tremendous.

Tom Hoffman is a senior vice president and manager of the Treasury Management Services Division at Bridge Bank. Reach him at (408) 556-8353 or

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Published in Northern California

Business banks can provide more to their clients than financial products. With all of their connections, bankers can steer businesses toward resources such as government entities and industry organizations that can help them grow and thrive.

“Their bankers should be introducing them to the people and organizations that know their industry like the back of their hand, and can offer assistance in everything from tax benefits to manufacturing locally,” says Gloria Ferguson, senior vice president and market manager of the Corporate Banking Division at Bridge Bank.

Smart Business spoke with Ferguson about the various resources available to local manufacturers and other businesses.

Why go to a bank for industry resources?

Choosing a bank that has extensive experience in your industry can be the difference between your bank offering you traditional banking services and your bank playing a vital role in the growth and success of your business. Part of the role of a consultative banker is to ensure clients are aware of the various resources available to them. When you become a client with a banker who knows your industry, he or she can help your business thrive. A banker who knows your industry is more likely to have a network of industry professionals and organizations and will also know the ins and outs of government resources available to you. Bankers have connections to a vast network of people from CPAs to lawyers to industry leaders.

As an example, the Bay Area participates in an annual manufacturing week during which people tour manufacturing companies in order to understand those businesses and help them take advantage of resources.

What are some of the local organizations dedicated to helping businesses?

California is a great example of a state with a strong support system for local businesses and manufacturers. Cities and the state of California have worked to attract and retain manufacturing companies by providing resources and benefits, things such as tax incentives and support for their labor force.

Manex has consultants that provide services to small and midsize manufacturers in Northern California. It has an edict to meet with companies to determine their needs and help create efficiencies in their business, whether that’s teaching them lean manufacturing methods or working with companies in foreign trade zones that may enable companies to receive tax advantages.

The East Bay Manufacturing Group seeks to educate manufacturers through sponsoring events with CEOs and CFOs on how to successfully run companies and solve common business problems.
SFMade supports San Francisco start-ups and manufacturers through industry specific education and networking opportunities, while connecting companies to local resources.

Also, there are additional resources provided by coalitions dedicated to innovation. The Bay Area Council, Innovation Tri-Valley Leadership Group and East Bay Leadership Council, and Fremont’s Innovation District and the Fremont Advanced & Sustainable Technology strategy explore common issues for manufacturers and seek solutions.

Why is manufacturing a particular area of focus?

Manufacturing covers such a broad spectrum of companies. It can be anything from semiconductor production to food processing. When you look at the Bay Area it’s very diverse in terms of manufacturing; there is everything from steel fabrication to bio companies, large-scale candymakers to industrial bakeries.

This is an area of focus because of the large amount of manufacturing that has moved overseas because of costs and regulations. In an effort to bring manufacturing back to California, cities and the state have worked to provide incentives and support to these companies. That’s why a lot of these organizations have been created — to attract and keep more manufacturing companies.

Although I’ve focused on manufacturing, it’s equally important to find a banker who knows your industry, no matter what business you’re in. There will be industry organizations, tax incentives and industry professionals that will be able to help your business, and your banker can be the person introducing you to this valuable network.

Gloria Ferguson is a senior vice president and market manager of the Corporate Banking Division at Bridge Bank. Reach her at (408) 556-8652 or

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Published in Northern California

“Relationship” might be the most overused word in banking these days, but it sums up the difference between providing a commodity and truly serving a customer’s needs.

“It really is about having a relationship with someone who comes to know and trust you,” says Jeffrey M. Whalen, senior vice president in the Specialty Markets division at Bridge Bank. “What we do in this industry is serve the needs of clients.”

Smart Business spoke with Whalen about how banks stay involved with clients and build mutually beneficial relationships.

Where should price fit into the decision when choosing a bank?

Most business owners say that, when it comes to choosing a bank, developing a long-term relationship in which owners feel empowered to achieve their goals is their highest priority.

Sole proprietors, closely held corporations and family owned businesses in particular want to get to know their banker, and they want their banker to know them and the ups and downs of their industry. They still want a competitive price, but more often than not, they are seeking a partner who can add real, tangible value to their business in the form of sector expertise, advisory services, etc.

Certainly there are business owners who do prioritize pricing above other aspects of a banking relationship, but in those instances, the owners shouldn’t be surprised if the relationship with their banker doesn’t yield much in terms of value-added services.

By nature, some businesses are very transactional and may not require value-added services. In those cases, business owners may look to other criteria to evaluate a potential banking relationship, such as how active the bank is in supporting their industry or business ecosystem, or how the bank’s core values align with theirs.

Some also want to deal with independent banks, as opposed to larger national banks, because they often have direct access to decision-makers. At a large bank, your account might be managed from a region far from your own, and local representatives can’t help you if there is a problem. For example, if you want to increase a line of credit or need help optimizing cash flows, a regional or independent bank may be able to respond faster because of its locale and relationship with you.

How can banking relationships provide additional benefits to the customer?

Relationship benefits depend in large part on what kind of bank you have chosen to partner with. Banks with a broad range of capabilities can, for example, accommodate an equally broad range of needs a business owner might have as his or her company moves throughout the business cycle. And banks with broad sector knowledge can bring a unique and valuable perspective to the table when helping a business owner evaluate options for growth and expansion, for example. Also, a bank should be able to bring forward a network of professional service providers who can help the owner with other issues that inevitably arise, such as how to establish an employee stock option plan, tax audit and preparation, etc.

So, the right relationship can yield a multitude of additional benefits, and it is important that these conversations are held prior to committing to a bank.

How frequently should bank personnel and clients meet?

It should be every month for larger, more complex client relationships and at least every quarter for smaller ones. Those guidelines, however, are general. Every business should be viewed as unique — because it is.

Therefore, the frequency of interactions with a banker should be driven by the needs of the client, and the dynamics of its business. It’s important for clients to know that a bank should have their best interests at heart and is there to solve problems. Sometimes a client might have problems it isn’t even aware of, but if its banker has the right experience and perspective, and if the communication in the relationship is frequent, the banker should be able to catch these problems before they impact the client’s business.

Communication in the relationship, combined with expertise on the side of the banker, is the key to getting the most in terms of value for the business owner. It really becomes a strong partnership if that can be achieved.

Jeffrey M. Whalen is a senior vice president, Specialty Markets, at Bridge Bank. Reach him at (408) 556-8614 or

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Published in Northern California

Companies looking to grow and needing an infusion of capital have several options, which come with various costs and requirements.

“We look at capital on a sort of continuum, with equity perhaps being the most expensive form primarily because of its diluting impact on ownership of the company. At the other end, there’s self-generated working capital derived from profitable operations,” says Paul Gibson, senior vice president and Eastern Region market manager at Bridge Bank. “In between there are a variety of financing options to assist a growing company.”

Smart Business spoke with Gibson about where small businesses fit along the continuum and options they have available to secure working capital.

What is the least expensive option to get working capital?

There is no cheaper form of capital than self-generated profits. Apple, Inc. is an example of a company that continues to be profitable and has a huge war chest of cash available for any need. But most small and growing businesses are not capitalized like Apple and look to banks to assist in the form of senior debt. This financing is usually based on a bank’s prime lending rate as its index and has a modest margin over, or under, this index. These loans are structured, including a senior secured lien on all assets through a Uniform Commercial Code filing and frequently have financial and/or performance loan covenants. There may be a borrowing formula and an advance rate against receivables as well. There is a direct relationship between pricing and structure, as all pricing is ultimately dictated by risk. When a business can’t adhere to a traditional covenant structure, the looser structure usually translates to increased pricing.

It’s best to determine working capital and growth capital needs first when exploring financing solutions. Next, identify the various capital sources starting at the least expensive and work down until sufficient working capital is obtained. Many times it’s possible to meet all needs with senior debt, but there is a limit to how much is available and that is largely determined by the profile and complexion of the company — overall assets, liabilities, cash flow, liquidity. All of these factors help identify risk.

Many growing businesses find it difficult to obtain traditional senior debt financing because they’re focused on growth at the expense of profitability. Some banks specialize in assisting companies in this dilemma, forging strong relationships long before the mega-banks will.

What’s next if companies can’t obtain sufficient senior debt?

Another potential source of working capital is subordinated debt, also known as mezzanine debt or venture debt. Subordinated lenders do not recover their first dollar in a liquidation scenario until the senior lender has collected its last dollar. This type of financing can take many forms.

With subordinated debt there is generally less structure than with senior debt. The reduced or even lack of covenants and junior lien position contribute to increased risk. Because there’s greater risk, subordinated debt also has a higher price.

Some banks offer these instruments, but more often commercial finance companies, hedge funds and other non-bank lenders offer them. The higher rates they charge are reflective of the higher cost of their capital, usually in investor funds or a bank line.

Why is cheaper not always better?

The true cost of capital shouldn’t only be measured in simple dollars or as the spread of basis points in an interest rate. The least expensive capital isn’t always the best capital because there are more factors than just price, such as opportunity costs, ease of use, flexibility of structure and other intangible benefits. For example, a low-interest loan with a covenant package that’s too restrictive can potentially result in a business disruption when a covenant violation occurs. Balancing pricing and structure relative to individual needs is critical when evaluating multiple loan options.

Most people assume that competition is the primary driver of pricing, but it’s not. Risk determines pricing — whether it’s equity or debt — and competition further refines it. Companies should understand their risk profile. It’s a powerful tool in helping to achieve the best outcome for a business’s financing needs.

Paul Gibson is a senior vice president, Eastern Region market manager, at Bridge Bank. Reach him at (703) 481-1705 or

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Published in National

Start-up companies in need of financing may not want to dilute ownership by bringing on additional investors. Fortunately, there are nontraditional financing products that can meet the need for capital.

“Revenue-producing start-up companies have options other than equity and one is going down the nontraditional debt financing route,” says Sarah Schmidt, senior vice president in the Capital Finance Division at Bridge Bank.

Smart Business spoke to Schmidt about nontraditional financing methods and how they work.

What nontraditional financing sources are available?

The two primary nontraditional financing sources are purchase order (PO) facilities and accounts receivable (AR) facilities. What makes those facilities attractive is that unlike a traditional bank line that requires low leverage, profitability and positive net worth, you can secure a PO facility or AR facility that is not governed by restrictive covenants. Instead, they focus on the value of the purchase orders and receivables. Leveraging your balance sheet by utilizing a PO or AR financing facility gives you the opportunity to limit your equity needs and, in turn, limit your ownership dilution.

Nontraditional financing facilities are more expensive than a traditional bank line but can provide significant value to owners of a company when they are able to preserve ownership and maintain a flexible access to working capital.

How do these facilities work?

With a PO facility, once a company receives a purchase order from a customer, it sends it to the bank and the bank advances a certain percentage against the purchase order. Once the purchase order coverts to a receivable, the bank advances against the receivable at a higher advance rate, repays the PO advance and provides additional working capital to the company.

Invoice by invoice financing traditionally involved the sale of the receivable at a discount, called factoring, but many banks and financial institutions instead lend against specific receivables while maintaining a secured-first priority position in the asset or pool of assets. This arrangement mirrors the structure of a more traditional bank line of credit, but manages the repayment risk by increasing the collateral monitoring and controls.

The mechanics of the facility are quite basic: When a company issues an invoice to its customer for the delivery of goods or completion of services, etc., and it has an invoice financing facility, the invoice, along with the backup information evidencing fulfillment, is sent to the bank. The advance is processed after completing the necessary due diligence on the invoice and customer. The bank is less concerned with financial covenant compliance in this scenario and is, instead, focusing on the strength of the company’s collateral.

Are these nontraditional financing methods particularly geared toward start-ups?

Most start-ups can’t qualify for traditional financing because of a lack of historic profitability, high leverage, an unproven business model and/or limited repayment sources — cash flows, outside assets of guarantors, etc. Since many entrepreneurs invest their nest egg into their companies, their personal guarantees don’t typically evidence significant outside net worth.

Depending on how much equity they’ve raised compared with cumulative net income (losses), they may report a negative net worth, which limits their ability to meet minimum leverage requirements. Companies with zero to $20 million in revenue often have trouble meeting financial covenant requirements for traditional bank financing. Their only other options might be really expensive mezzanine or venture debt, which they may not be able to secure, or selling equity in the company by bringing on new investors.

While strategic investors can help to take your company to the next level through key relationships, industry experience and general business acumen, nontraditional financing can be a great option to leverage a growing balance sheet and limit ongoing equity dilution.

Sarah Schmidt is senior vice president, Capital Finance Division, at Bridge Bank. Reach her at (415) 508-2501 or

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Published in National

Commercial banking today isn’t just about loans, it involves a partnership with a bank that helps build a business.

“Probably the most overused word in banking right now is relationship; everyone talks about it,” says Paul Duren, senior vice president at Bridge Bank. “Several data collection agencies even changed their terminology from ‘standard commercial loans’ to ‘relationship loans.’ But what exactly does that mean?”

Smart Business spoke with Duren about what relationship banking means and how it can translate into improved customer service as well as increased profits for your company.

What makes for a good banking relationship?

A good relationship involves a banker bringing value beyond providing access to capital. Businesses need a banker who understands their business — one who takes the time to learn about your vision so he or she can fully understand your goals. A proactive banker can anticipate your needs and bring information and services to help you grow or run your business.

In a good banking relationship, the banker acts as your advocate within the bank. However, much of the banking industry utilizes centralized credit processing and call centers, so there isn’t always the personal touch that a good banker will provide.

Can you provide an example of how this relationship works?

There was a drink manufacturer that saw a need to take its product from powder form to liquid for store shelves, and needed additional capital to do so. The banker saw the vision and understood the potential market for the product. That extra capital turned the company from a small manufacturer to a major player in the sports nutrition industry, and it started with an injection of capital from a loan made possible because a banker understood the vision.

Has banking changed since the recent recession?

It definitely has. There’s been growth in lending, but there’s also been a shift to more small and medium business sector loans coming from small and medium-sized banks. According to the Small Business Administration, big banks controlled 31 percent of the small business loan market in 2005, and that grew to 39 percent in 2009. That trend has reversed and small banks are gaining more share of that market. A Federal Reserve Bank of Boston study showed that smaller institutions continued to lend to small businesses at a stable rate during the recession, whereas big banks cut back.

Small to medium-sized banks are more invested in the community and more invested in the small business owner. For that reason, they are more likely to provide financing. Bigger banks focus on large companies in order to move their numbers. A smaller bank can get the same percentage growth through smaller loans. In one of its papers, the Federal Reserve Bank of Boston talks about how community banks are better at the soft skills — understanding the vision of the business owner, how he or she operates. Small banks take the time to listen.

What are the benefits of a good banking relationship beyond access to capital?

When people talk about relationships, they focus on the loan. What gets neglected is the deposit, or treasury management, side of the relationship.

During the downturn, businesses were looking for ways to get more out of their existing systems. Banks can help them do that with data feeds and other ways that save significant time and money. A good relationship banker also reviews the customer’s systems.

An experienced relationship banker has a toolbox filled with solutions to help his or her clients. This business is still about people, and banks need to be in touch with their customers and the community.

Paul Duren is senior vice president at Bridge Bank. Reach him at (408) 556-8688 or

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