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Lenders look inside and outside your company
by Jean Wojtowicz, President
Cambridge Capital Management Corporation
Q: I have always considered my banker to be one of my most important business relationships. I’ve run a successful business for over ten years and have been planning a second manufacturing line for at least two years. My banker knows all this and has been encouraging all the way.
Now, when I’m ready to expand, suddenly the bank seems to be waffling. They want more than my business plan and seem to be concerned about factors I can’t control: like other producers coming into my market.
What’s up?
A: You have described a competitive situation that could drastically affect your business performance, and yet you are worried that the bank won’t lend you money? What if the bank follows through and loans you the full amount you have discussed; and then you can’t pay it back because of business conditions that are outside your control?
I’m reminded of the old retail strategy: locate your hamburger restaurant close to another hamburger restaurant. Or auto dealers near another one. Customer traffic patterns will focus on areas of town and then disperse to the various restaurants and auto dealers nearby.
That formula works in manufacturing to a certain degree because it is important to be fairly close to suppliers and customers. However, your business can be derailed by companies that you will never see because they are thousands of miles away.
Your banker knows this, and he is concerned for your welfare.
When evaluating a potential loan, a commercial lender looks inside and outside the company that is seeking financing. An internal examination includes a business plan, the uniqueness and quality of the product or service delivered by the company, and the track record and character of the managers.
An examination of external factors that may influence a company would likely include the possible effect of government regulations, penetration of the market by outsiders, and whether your company possesses the strength to withstand a challenge.
Lenders tend to give more weight to company management over every other factor. We like to see people with a passion for their work and the ability to organize themselves and others. It is a rare combination.
But even the best-run company can be overwhelmed by competition. That’s always been true, but it is truer today.
Think of it: how do American manufacturing firms compete against foreign companies? Often, American firms market their abilities to customize orders and deliver them faster. On the other hand, if your product can be made cheaply by a company in, say China, and delivered to customers in your area, what can you do?
Recently, American makers of seamless stainless steel tubing used in food processing, among other things, formed a coalition to market their products against Chinese makers of the same product. Imports of such tubing tripled from 2004 to 2006, and 500 Chinese companies can make enough tubing for their domestic needs and have plenty left over for exports.
I don’t know exactly what your product is, but I would advise you to talk seriously to your banker to find out the root of his problem with your expansion. He may advise you to form an alliance with similar companies, adjust your products, or work with him to identify alternative sources of financing to lessen the risk to the bank.
Good luck.
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