Hiking the Money Trail
At long last, decorators once again have access to credit lines and loans to sustain their businesses and start growing. The catch: They must present the right business profile to get lenders on board. Here's how to navigate today's credit and loan environment.
By Robert Carey
In Idaho, Doug Victor zeroes in on a growth opportunity. The vice president of Adgear Promotions, outside Boise, is this close to securing a $35,000 bank loan. The plan: Pay off several vendor invoices early, and then use the firm's 2010 cash flow to secure inventory of certain fabrics and colors in order to break into a different category and steal market share from larger competitors.
And in Florida, Mitchell Lombard is pouncing on his own opportunity to expand. The president of Atlas Embroidery & Screen Printing (asi/700400) in Fort Lauderdale just ordered half a million dollars in new equipment to break into all-over printing. "I want to run with the larger decorating houses, as well as do more for the large retail chains," he says. "It only took me seven days in March to get a commitment from the Small Business Administration (SBA) on a 504 loan for equipment and machinery, at 4.5% interest over 10 years." What's more, the facility that will house Lombard's new machinery was built with the proceeds of another SBA loan the firm landed in 2009.
Every apparel decorator should be happy to hear about these companies' moves to become stronger competitors. Why? Because it means: a) there's enough customer demand to reignite the entrepreneurial spirits within this industry, and b) decorators and advertising specialty distributors are again convincing lenders that it's a safe bet to give money and extend credit to them.
Now, this certainly doesn't mean that it's easy to access money – just that it's possible. "It doesn't matter how big or small you are. If your firm doesn't have a great track record of paying back loans or paying off debt, you aren't getting money or even a credit card in this environment," Lombard says. He should know, as his request for a slightly larger credit line to cover a one-time cost overrun was rejected by the same bank that made one of his loans. "You have to prove you're got solid business going forward, too," he says. "But I'd say the apparel and decorating businesses are pretty solid across the country compared to other industries. I think the lending environment is only going to get better for us. The money seems to be there, and people need to go ask for it to get things moving again."
The 10,000-Foot View
Lending by national and community banks that's backed by guarantees from the SBA has begun to rebound from last year's wipeout (for descriptions of various SBA loan programs, see the sidebar below). With overt support from President Obama, the SBA's flagship programs funded a whopping 60% more loans in Q1 2010 than in Q1 2009, totaling $3.7 billion. What's more, Obama wants $30 billion from the money returned to the government from the TARP banking bailout to be added to the total used for small-business lending by community banks. This needs congressional approval; if it fails, Obama might suggest another means of funding the plan. Karen Mills, director of the SBA, explains that, "When you put $30 billion of capital out there, you actually get much more money than that going toward lending, because those banks leverage it up."
The national banks are warming up somewhat to small business. Bank of America – whose CEO, Ken Lewis, infamously called his bank's business-loan portfolio "a damn disaster" last year – pledged to loan an additional $5 billion to small businesses in 2010. Wells Fargo was inconsistent in making more business loans over the past year, but remains by far the largest lender to small firms, at $73.8 billion.
Some banks are unapologetic about not ramping up lending again; with small-business defaults still very high, there's government pressure to shore up their capital ratios and reduce overall risk. Besides the bank meltdown in late 2008, there's more recent proof of catastrophic consequences for imprudent financial firms: Two key small-business lenders, CIT Group and Advanta, filed for bankruptcy in mid-2009.
These bankruptcies left at least one mid-size decorating firm, Team Mates Inc. in Eagan, MN, scrambling to secure other financing just to keep its operations going. "A few months before Advanta went under, they jacked the interest rate on our corporate card to 36%, even though we had never missed a payment," says Mike Little, president of Team Mates. "It was just their way of trying to not extend credit to us anymore. I would have defaulted on the card at that rate."
Fortunately, Little was able to secure a consolidation loan from a community bank to pay off the card's balance plus an old SBA loan – and even free up some monthly cash in the process. "With interest rates so low right now, we were able to roll several loan payments that totaled $7,500 a month into one loan costing $3,500 a month," he says.
While that was a happy ending, presently low interest rates might actually hurt access to money in 2010. "It's one of the reasons lending is having a hard time getting off the ground," says Brian Wesbury, chief economist at First Trust Portfolios. "Why would someone lend at 3.5% to a small business that has little room for error, especially if they expect rates to go up?"
Even so, JPMorgan Chase followed Bank of America's lead by announcing an increase in its small-business lending by $4 billion in 2010. A company spokesman notes the bank is starting to see healthier business-loan applicants than six months ago, and that it's hired 325 additional small-business specialists nationwide.
More such action needs to happen at other banks, or else many viable firms could be left with too little credit to grow during this razor-thin recovery – or even to finance routine operations such as buying raw materials to fill customer orders. In fact, one-third of small-business owners don't feel confident they can get access to the capital they need to grow, according to a March survey from American Express OPEN Small Business Monitor. And less than 20% say they're getting the capital they need to run their business from a bank loan.
Beyond the traditional bank loans and credit lines, there are other options. "SBA loans are great if you can get them," says Daniel Drew, founder of Unsecured BizLoan.com. "But on the whole, things like unsecured business loans, unsecured business lines of credit, and cash-advance options from other financiers might be more convenient and easier to qualify for than SBA loans." Each of these options has stipulations and requirements, and is based in part on healthy accounts receivable plus other factors the applicant can document.
Lombard notes that some small firms "will probably need the owner to sign personally for a business loan, and put his house, cars or whatever on the line." What's more, for such daring business owners, home-equity loans have a powerful allure: They offer liquidity without having to submit overly detailed business plans. On the other hand, "The scrutiny a loan officer gives to a business plan before signing off on a commercial loan can benefit owners in the long run," Norm Bour, founder of BusinessCashFlowPros.com, recently told CNNmoney.com. "The scrutiny makes the owners think harder. Too many people run small businesses by the seat of their pants," and with unrealistic optimism that a cash infusion can often make worse.
However, if the owner has a personal credit line available, drawing it down now might pay off later. A borrower could take the entire amount and put it into a money market account or CD. "Maybe you don't let that money sit there, because the bank could easily freeze it. Instead, it can become insurance so that you will have liquidity," says Wes Moss, author of Starting From Scratch and chief investment strategist at Capital Investment Advisors. "Although it might not seem to make perfect financial sense – you'll be paying a higher interest rate to use the home equity money than you'll be earning on it – it can be worth the peace of mind" that comes from financial flexibility.
From the top of the mountain, Federal Reserve Chairman Ben Bernanke recently stated that "Many small businesses have seen their bank credit lines reduced or eliminated, or have been able to obtain credit only on significantly more restrictive terms. The fraction of small businesses reporting difficulty in obtaining credit is near a record high. This could hinder the expansion of small and medium-sized businesses and prevent the formation of new businesses," which would stifle job growth – and likely hold down demand throughout the decorated-apparel industry.
The View From the Ground
Most decorator and distributor firms already have some sort of relationship with either a national or community bank. But the strength of that relationship is dependent almost entirely on communication from the customer, so executives must be proactive if they expect their banks to act as an ally at critical moments. "Get to know your banker. It's the one thing people seem to have forgotten over the past few years," Little says. "Take him or her to lunch, tell them about what's going on in your business, and show financial statements to prove you're going along smoothly and that your balance sheet is pretty clean. One person in a bank can have a lot of leeway to assist you when it comes to certain decisions."
Case in point: Direct Focus Marketing Communications in Winnipeg, Manitoba, Canada, faced a situation that could have sent the firm under, but its banking relationship saved the day. Last year, a few of its larger clients were unable to pay on time, and receivables in the six figures had to be stretched out over a 24-month span. Alan Friesen, a director for the decorating and marketing firm, feared that it would have to dip more heavily into its existing lines of credit for working capital – lines that might dry up once the bank learned of the delinquent receivables.
"The delinquencies were affecting our ability to pay suppliers," Friesen says. "But when our banks looked at the pattern we established over the long term, they were willing to work with us. They could have considered those receivables as bad debt and cut us off, but they didn't. It was our most difficult time, so thank goodness for those relationships."
In fact, a banker who's confident in a decorator will sometimes step in to benefit that client even when it's not necessary. Victor works with three banks ("I actually get business from all three, so I spread my business among them," he says), and he meets with each contact regularly. Once, when Adgear Promotions started to tap into a line of credit it hadn't used before, one banker noticed not just the activity, but that the line had a higher interest rate than another line Adgear could qualify for. The bank rolled the client into the lower-interest product, saving Adgear on lending costs.
Mitch Emoff, executive vice president of Goldner Associates (asi/209800) in Nashville, TN, says that a certain combination of factors seems to give a firm the best chance at securing credit lines or loans. First, "You need to get your debt-to-equity ratio to less than two; that's what banks really focus on," he says. Next, "Always try to show a profit, no matter how small. That's a moral victory among the bankers, and if you already have a good relationship with someone there it really helps them to be able to go to bat for you. Finally, even with a borderline balance sheet today, if you show you're going in the right direction with receivables, costs, client retention and new business, a banker can work with that to some degree."
Andy Straus, president of Goldner, meets with the firm's bankers quarterly to give financial updates, while Emoff also sits with the bankers during the annual financial review. Emoff knows the hard work that must take place every week so that Straus can keep presenting an attractive balance sheet. "When the bankers see that we have lower total revenue from the prior year because of the poor economy, they also see that we adjust operations to keep our profits consistent," he says. "And we get into that position not only by cutting costs, but also attacking problems in receivables and getting good agreements that keep the money coming in no matter the economic climate."
For instance, one large client called Goldner to insist on a change in credit terms from net 10 days to 2%/10 days. However, "That would mean we were giving away too much," Emoff says. "Some people feel they have to accommodate the client at all costs these days, but we started a dialogue to find out what their larger objective was in asking for such a big change." It turns out the client needed better cash flow, so Goldner compromised by giving a little more time to pay and a smaller discount on that time frame: 1%/15 days. "We got to the root of the problem and found a solution that was good for their finances, and for ours," Emoff says.
All these things boost lenders' confidence in a decorator's future prospects, making it easier for lenders to choose to invest in that future.
ROBERT CAREY is a contributing writer for Stitches.