Don’t Bank on These Guys for Help!
You may have heard about someone going out of business lately, shook your head and said “That’s a shame” and continued with your day. After five years of recession, consumer fatigue, stalled housing and increasing competition, we all knew a shake out was inevitable.
Most people assume that failing companies are badly run, saddled with debt and just not up to life in today’s retail fast lane. And there is some of that, no question – owners unwilling or unable to change their strategies and operations. When the national lawn and garden market shrinks 20+% since 2007 and the sales of trees and shrubs drop by 46% in 4 years (National Gardening Survey), retail decisionmakers had better be nimble … or else!
But sadly, there is more to it: garden centers that are making money go out of businesses too. We know of two (over 100 successful years between them) who are currently scrambling to stay in business despite positive cash flow, increasing customer count and on-time bill paying.
The reason? National brand banks are turning away from their traditional role of credit-line supporter. Maybe there was a bankers’ convention about the dangers of “exposure” to small family-held garden retailers. Maybe being awash in cash, large banks have decided they can afford to drop these relatively small accounts – they probably never were very profitable with low bonus opportunities for the top cats anyway.
Let’s Blame the Fed
We know an owner who was excitedly taken on-board with an aggressive pitch and very competitive terms by a national bank in 2007. The bank won all his business, loans, merchant fees and credit line effectively tying up all their collateral against long term construction loans. Now he is told that the yearly rubber-stamp for a winter credit line (always paid back on time in spring) has been refused and their application sent to the bank’s own “Graveyard”.
There, bean counters who know nothing about their customer, will declare the business too risky according to their formula. Even more galling is a bank tendency to blame this on the Federal government’s post 2008 lending guidelines. The retailer said to me, “Didn’t I – the taxpayer – just bail them out? This is what I get in return!”
After many years of providing local employment, creating wealth and running many millions of dollars in sales through the bank year after year it’s over; but you can’t fight it. Today’s reality is to learn and move on.
A “DUH!” Moment
This retailer was told that as their company didn’t make a profit last year, they couldn’t have a credit line. Well, DUH! It is a privately held company, of course they didn’t show a Net Profit on their Profit and Loss statement! But if the bank was interested enough (obviously not) to do an EBITDA calculation from the same documents and spend about 15 minutes on the phone with the owner (as I did), they would see that there was plenty of Net Cash Flow (a much more accurate measure) generated last year.
The kicker is that with the national bank holding the retailer’s collateral, no other bank will give them a credit line either. So, like others we know, this retailer is now schlepping his business around town to see how community-minded these local banks really are. The owners are cheered by the attitudes of managers they are now “interviewing” for the privilege of being their customer, so they feel safe, at least until that local bank gets amalgamated into another national “brand” with lush ads and silly mileage cards.
No names mentioned here (to protect our own Net Cash Flow!) but that same national brand name comes up a lot these days in this discussion. Clearly as they grew from regional retail and community bank to international investment and commercial banking giant, they forgot to read their own “Visions and Values” (I am being kind), or are simply dumping the small businesses that once were their life blood.
The Moral of the Story
The moral, if that word fits in a banking story, is to find a bank who knows that your business matters to them financially. Remember, your weekend cash flow is their source of loan money next week! Now is the time to be a bigger fish in a much smaller pond. Be prepared with true Net Cash Flow documents, not just your own P&L or tax docs. Find a bank (still one that is insured and tested by the Feds preferably!) with a few branches in town, where the decision maker might even know your store. Most cities do still have a few banks living by their original values without visions of grandeur. (Who knows, the manager might just show up for that seminar on herbs!)
If you’re not ready to hang out that “Closed” sign for good, your banker needs to be an ally for you, not an adversary. It’s time for you to practice what you preach to your own customers: SHOP LOCAL.
Carol MillerSep 4, 2013 at 3:37 pm
A call to arms! I’ve heard similar stories from retailers who expect a routine approval for a line of credit and instead get called in with a threat of having their building loans called. I do have a question, though. Will smaller banks value cash flow over profit, or see a store not making a profit over two or three years as a bad risk?
Ian BaldwinSep 4, 2013 at 10:12 pm
Carol, good comment. If smaller banks stick to being good business people and assess the long term fundamentals of a borrower things will be fine, we might even get some trust and stability again! If a business’s basics are weak in the first place the banks shouldn’t be lending anyway (especially if they are lending my money!). Retailers should always remember that the steady cash flow they bring to the banks every week is a very under-appreciated bargaining card. Ian
Philip Schaafsma SrSep 5, 2013 at 5:06 am
As someone who has gone through most of what you write about, I can add that no matter how great your relationship is with your bank, once it is closed by teh FDIC or purchased by another BIG BANK, you are just another asset (or liability)
Ian BaldwinSep 5, 2013 at 5:56 am
Good morning Phil, I was thinking about you as I wrote this, hope you are doing well. Nothing much has changed since it happened to you I am sorry to say, small businesses all need to be very aware of their banking circumstances and I know you can advise others from your own awful experience. Thanks for your comments, take care,
Jim CrowellSep 5, 2013 at 1:51 pm
As someone who lost their line of credit of $ 500,000 but has still managed to “hang on” despite a reduction of 60% of Atlantic’s gross sales I would suggest that garden centers have to operate on a 10 to 15% net profit to start with and then back everything down from there. We can not hope to end up with a good profit after all has been spent on labor, cost of goods sold, overhead etc. Large salaries for owners and their families must also go by the wayside in order to prove that we can run good businesses as if we have to report to a”real” board of directors which we do not of course have to do. Placing extra cash in local banks in spring would also give us some bargaining chips and I suggest renewing lines of credit in June each year instead of winter. Jim
Ian BaldwinSep 5, 2013 at 4:20 pm
Jim, excellent suggestions and spoken from your real experience over the last few years as we know. I like the idea of using more than one local bank for spring cash flow deposits, that would be simple enough to administer and as you say it gives you more bargaining power. In regards to starting with an assumed Net Profit, that’s way I learned to do it (all those years ago!), that way tells you what you can and cannot spend unless you cut something else or raise your Gross Margin – allowing for “The Gap” of course on the way! Thanks for taking the time! Ian
Edward KnaptonSep 12, 2013 at 1:24 pm
Lets see bank line cancelled by Farm Credit – they put me on terms to pay it off at 2 points higher interest rate than I had been paying. Told me I was going to fail. Bank line cancelled by US bank. In both cases I was told line would be renewed by loan officer but never was. Existing $600,000 Line cancelled by an un announced meeting Friday June 13 by my existing bank and told to go bankrupt. They renewed the line 45 days later but told me I could not pay existing creditors with line. It took me two years to generate the $250,000 in extra cash to pay off creditors. In all cases – all terms of loan were met and principle and interest paid on time. We have continued to grow and have grown from about $750,000 with Farm Credit to over two million. Carol and I are working and doing everything we can to someday not need a line and to be able to say to Dave Ramsey – I am debt free!!! Oh by the way the board members, president and my senoir loan officer all shop with us but they still cancelled my $600,000 line which was at zero and had 60 days to go before it expired. I trust no one when it comes to banking.
Edward KnaptonSep 12, 2013 at 1:31 pm
Just a follow-up to my previous comment. It is only by the grace of God that we are still in business. Carol and I sincerely believe the Lord has blessed us with miracles as we try every day to use America’s Best Flowers and our saying and registered trademark “Beauty with Gods help for you! to lead people to Jesus Christ. At times to this day over the past 35 years we look back and wonder how did we do that. We know we did not do it – Jesus did it.