As a commercial lender in Oklahoma, a young person and single mother came to the bank with a mutual friend. They approached me about starting a business. We had several discussions over the next couple of weeks as she was gathering information. The projections and market research was adequate to make the loan request to start the business. It was more of a venture capital loan than a commercial loan, but the information was solid. Now it came down to the experience of the individual and management experience.
We set the loan up for five years on monthly payments. The loan paid perfectly and as agreed. After the loan was paid off as agreed, the business owner requested a meeting. We met. The meeting was to expand the business with an additional location. At the time my biggest concerns were that she was going to increase her overhead two fold and cannibalize her existing business.
After much projections on my part and cash flow analysis, I softly turned down the expansion loan. In my opinion, most bankers would have made this loan because of her track record of payment. The owner was obviously upset. So she set out to prove me and the world wrong. She sought individual funding.
Fast forward two year’s later and the small business owner called me and requested a meeting. She was bringing her attorney, who was a friend of mine, and her accountant. After a quick conversation, the attorney removed himself from the meeting and the owner and accountant asked me to help them solve their problem. After having received the advice not to expand, she did it anyway and now she needed help from going broke. She was headed into bankruptcy.
Fundamentally, the business had great cash flow. She needed to expand, but not to locations, just adding space. Her original lease was up for renewal and had an idea of what to do, but didn’t have the capital to move locations.
I gave them a list of documentation I needed. It consisted of a financial statement over the past two years, income information and cash flow statements along with tax returns and many other documents. After spending an enormous amount of time analyzing the information, I called the accountant and owner. We had a meeting. Based on the information provided, I found a formula for success.
At the meeting, I gave a presentation to the owner and the accountant of all the shortfalls I found inside the financials. The shortfalls were inventory controls, payroll controls, measured benchmarks and numerous of other things that were fundamentally wrong with running a business. After the negative, I presented a proposal for them. Under very certain covenants, the bank would be willing to make a capital loan to save the business. The main reason, the cash flow was there.
Five years later, the loan paid as agreed. The entrepreneur established a retirement account, increased her take-home pay, established a retirement account for each of her employees, increased her income by 50% and her profitability increased dramatically.
The moral of the story: your self-employed customers know how to do the work well. Most of them don’t know the financial side of the business. Over the past 20 plus years, I have seen this happen in all sizes of businesses. As Bankers, we are own worst enemies. We have blinders on when it comes to our customers. We are too close to the decision in many ways from loan growth to profitability inside our portfolios. But we won’t separate ourselves.
That is where McSwain Consulting comes in. We have over 20-years’ experience in cash flow analysis and loan review in Oklahoma, Kansas, and Texas. We understand main street and beyond.
A good friend and business partner’s definition of a good banker, “A good banker is one that will get you in trouble by loaning you more money than you can pay back”. Let’s not be that banker.
David McSwain is an Oklahoma bank consultant and president of McSwain Consulting providing loan risk management solutions and bank consulting services to community banks in Oklahoma, Texas, and Kansas.