Banking & the Economy: Rising Optimism Means Growth Opportunity

Spurred by increasing demand for products and services, many of our region’s small business leaders are making the commitment to expand or to launch their new enterprise. Before you pull the trigger, learn how banking services can help you to reach your goal.

Rick Francois knows a thing or two about business starts and growth. In a sense, the banker is also an entrepreneur.

The executive vice president and chief credit officer of American Community Bank, with four locations in McHenry County, Francois is one of three principals who helped to launch the bank in 2000. Together, the American Community team built a board of like-minded directors, assembled investors and plowed through regulatory requirements.

Whenever he meets with someone who wants to start or grow their business, Francois knows where they’re coming from. And lately, he’s having that conversation more often.

Business owners in our region, increasingly optimistic about their fortunes, are making the commitment to launch or expand their enterprises. There’s still reason for caution, yet many businesses are finding they can’t help but pull the trigger. The opportunities are too present to be ignored.

For those smaller and mid-sized businesses in our region that are ready to accept the risks, community bankers stand ready to be a partner in growth.

“I think it’s always a unique decision for a person, because they have to individualize where they’re at financially and where they’re at in this point in time,” says Francois. “But, absolutely, I think there’s a lot of momentum and strength in the marketplace that now is a pretty good time to follow your dreams.”

The Tools of Growth

Most bankers liken lending to a box. A mortgage or consumer loan might fit into a fairly rigid box – either you fit or you don’t. But in commercial lending every deal is unique.

“With a commercial loan, you have to ask, ‘How can I bend this box to fit what they want?’” says Rob Grammer, chief credit officer for McHenry Savings Bank, with locations in northeast McHenry County. “You basically customize each loan to each business, because each business is different. Every box will be different. You still have guidelines, but they’re not so strict. My philosophy is that any deal’s doable. However, the customer might not like or accept the proposed terms and conditions.”

A business in startup or growth mode is most in need of capital and credit – capital to support big-ticket expenses and credit to bridge one’s cash flow needs. Bankers have a number of options available.

Grammer often pushes startup businesses toward products through the federal Small Business Administration (SBA), which provides a variety of funding solutions to small enterprises.

Clients pursuing SBA loans need to consider cash flow projections, a good credit score for the business owner(s), and some form of collateral. And yes, you will need to put some “skin in the game,” whether it’s a home, business assets or other financial assets. Bankers want to know the entrepreneur is fully committed.

“Often, with a startup or fairly new small business, if there’s a conflict or something that keeps us from moving forward, it’s because folks don’t understand that the bank is unable to provide 100 percent financing of your enterprise,” says Rick Zonts, senior vice president and market manager at Elgin State Bank, in Elgin. “As owners, there are equity and capital injection requirements, per bank and SBA policies.”

Francois, of American Community Bank, considers the relationship between banker and business owner to be a partnership, where both parties work toward accomplishing a common goal.

“Ultimately, successful businesses start with owners who risk some of their own capital,” he says. “And banks tend to step in and play that role of finding additional capital to help fund that growth and success they have, whether it’s funding working capital lines for receivables and inventory, or for purchasing equipment under term loans.”

When it comes to existing businesses, Grammer finds that asset-based lines of credit are a helpful tool to fund working capital needs. These kinds of loans work by providing up to a percentage of a business’ accounts receivable, and they will require more stringent financial reporting. Credit lines will fluctuate based on the amount of receivables.

“Now, this will enable the businesses in growth mode to leverage their funds, so they’re not waiting for those funds before moving on to the next job,” explains Grammer. “When a business is growing, their cash flow needs will increase faster than what may be available.”

Technology is also making it easier for bankers and their clients to work together, even if it’s during unusual hours. Online banking systems, accessible 24/7, enable customers to monitor cash flow, transfer funds, make payments, transfer money on existing lines of credit, and any number of other essential services.

“We find that our more successful businesses are taking advantage of that, and really going online, doing everything online and monitoring it on a daily basis,” says Grammer.

People Matter

From a banker’s perspective, it’s important to understand the people you’re working with and lending to. Before granting a loan, John McNamara, first vice president and senior lender at The State Bank of Geneva, looks closely at the individual and how thoroughly they’re prepared for business ownership.

“It’s important to look at those elements of people – their background, their experiences, their knowledge, their personal liquidity, all those personal elements that tell us how likely they are to succeed,” says McNamara. “We’re going to look at collateral, cash flow and all of that, but we’ll also ask about your background, your skin in the game. What have you put in to make this a reality?”

Nearly 80 percent of businesses will fail in their first year, according to the SBA. Because the risk of failure is a strong possibility, Grammer wants to know that a new business owner can succeed, despite the challenges ahead.

“As soon as they open their business, on Day One, that business plan is going to change,” says Grammer. “We look at the underlying borrower, to understand whether they, in their existing situation, can support the debt for this business venture.”

For an existing business, Grammer looks closely at the financials. Do they have organized records and projections? Are there any warning signs, like overdrafts on their accounts or high balances on their existing line of credit?

“The businesses that do well know exactly where they’re at, from day to day,” says Grammer. “The ones that raise red flags are the ones who have no idea what their financial situation is. They’re just out there working.”

Zonts, too, likes to see detailed documentation, including one to two years of cash flow projections. He’s looking for details on expected revenues and expenses, profitability, and the impact on the business’ current profit/loss statements.

Because new businesses might not have these documents, Zonts helps newcomers to find resources. He often directs clients to the SBA documentation library online and to Service Core of Retired Executives (SCORE), a nonprofit whose members provide insights and advice to business owners.

Ania Dwyer, vice president of commercial banking at Elgin State Bank, looks for similar signals, but she’s also looking at the debt service coverage ratio. Businesses may need to fall within certain parameters to be eligible for financing.
“The ratio shows how much net income your business generates in relation to your debt payments on an annual basis,” she says. “The general guideline is that, for every dollar of annual debt payments, the business should have $1.25 of free cash flow to qualify for a loan.”

Don’t discount the value of financial reporting, adds Zonts. In some cases, that documentation is required by law, to hold both banks and business owners accountable. Business owners who find themselves falling behind in preparing financial statements in-house should consider paying a qualified accountant.

“It helps regulators be comfortable with the information we’re receiving and knowing we’re making good decisions, based on good financial information,” says Zonts. “While there’s a relationship personally between the lender and the business owner, this is important financial information. We trust in every detail and every penny of it.”

He understands that sometimes it may seem overly intrusive when banks ask for so many details, but federal regulations, such as the Dodd-Frank Act, require it.

“Some business owners were used to a more relaxed system in the early to mid-2000s,” says Zonts, who’s been in community banking for 20 years. “Now, a borrower may have an early perception of a lack of initial trust, because we’re asking for a fair amount of documentation. However, it’s really regulatory-driven. At the end of the day it’s prudent, but it can be perceived as cumbersome to the business owner.”

Common Pitfalls

Growth was always in the cards for American Community Bank. Within a year of opening its first location, in Woodstock, in 2000, the bank was surpassing $100 million in assets and preparing to open a second location in McHenry. The bank continued connecting with its market and over the next seven years two more banks were opened, one in Crystal Lake, another in Huntley.

As a bank principal and director, Francois understands the challenges and risks that come with business growth, and he’s able to share that knowledge with clients. In more than 20 years of banking, Francois has seen his share of new enterprises fall victim to their own success.

“One of the biggest challenges most startups face is the lack of capital they have, and they find that as they get into their business and have any level of success, capital becomes more of a demand,” says Francois. “When you don’t start with enough capital, then very quickly you’re back to finding more capital and that distracts you from your business purpose.”

Dwyer, of Elgin State Bank, fields many calls from prospective business owners and people who run growing companies. She finds many newcomers are surprised by the level of commitment required to succeed. Many aren’t aware that their own credit score may also factor in to a lender’s decision.

“A lot of times they’re surprised they also have to have skin in the game, that their personal guarantee and personal assets may be part of the deal,” she says. “And because of everything that’s happened in the past 10 or 15 years with the financial crisis, people are confused about what they can do, and what they can’t do now.”

Francois believes one of the first phone calls a growth-minded business owner should make is to a trusted banker. That person can help the owner to connect with the right partners who can make a dream into reality.

McNamara, of State Bank of Geneva, encourages his clients to become a true partner – to be detailed, honest and diligent.

“I’m your advocate,” he says. “I go before the bank’s board of directors, for you. If I’m going to truly be your advocate, I need to know everything. If there’s something that’s not so good, let’s put it on the table and figure our way through it. If there’s a reason why it happened, let’s talk about it.”

When there’s synergy between a banker and his client, that’s when McNamara believes the relationship is at its best.
“We can help one another,” he says. “It’s a cooperative effort. Your success is my success. My success is your success.”

Too often, Francois sees business owners who forget that such professionals are ready to help.

“A lot of times an entrepreneur may be very strong in some areas, because that’s what drives them and they have a passion for it,” says Francois. “They need to be able to identify what their weaknesses are, so they can seek out advisers in those areas. For a small business, that may mean finding a good banker, finding a good accountant, finding a good attorney and leveraging their skills.”

The Local Experts

The client was floored. Could it really be that this banker was emailing him late at night, responding almost in real time? Yes, he was.

“The client called me on a Saturday, and I was there working,” says McNamara, who made the leap into community banking 20 years ago, after working in investment banking. “He was completely floored that I was in the office, that our people were here and working. We ended up doing a deal and now he’s got other deals he’s working on.”

Such dedication is part of the reason State Bank of Geneva has continued to serve its community for 114 years. But it’s also the hallmark of community banks – that is, a locally owned and operated institution, often one with less than $1 billion in assets. Such banks distinguish themselves by providing friendly, reliable, local service, especially to smaller firms.

Francois and his partners created American Community Bank in reaction to their own disappointing experiences in large, national institutions.

“A bank our size, your differentiator has to be your personal service, your personal touch, and your ability to know your clientele a little deeper than another organization would,” he says.

The crew at Elgin State Bank delivers the unusual combination of a small bank within a big bank. A locally controlled part of St. Charles Bank & Trust, Elgin State also is a locally operated component of Wintrust Financial, one of the largest regional banks in the Chicago area. Clients at Elgin State receive the local control they can expect at a small bank combined with the additional services of a larger bank.

“The credit committee lives in the community where we do our lending,” says Dwyer, who worked with large banks in Chicago before arriving in Elgin. “Our lenders are familiar with the market, with the client and the client’s needs. Products are very tailored to the customer’s needs, where the bigger banks, a lot of times, have trouble convincing someone out of state on why this client is creditworthy, or why the Elgin market is different from, say, Michigan or Ohio.”

A Look at Local Growth

Dwyer and Zonts have fielded a number of calls this year from people interested in starting or expanding a business. Among those calls, they’ve heard of people wanting to get into real estate and house flipping (still very risky, says Dwyer), manufacturers and distributors needing to satisfy orders, and medical practices setting up shop.

“I’ve had quite a few calls in the past months from chiropractors, folks graduating with their degrees and developing their business plans,” Dwyer says. “Everyone calling is doing their homework. When they call, their business plans show they know their competition and where to locate.”

Zonts recently helped a store display manufacturer to acquire equipment, helped an aerospace manufacturer to purchase a building and equipment, and a refrigeration distributor to double its footprint. He’s also seeing strong expansion in warehousing and logistics, as more consumers purchase goods and services online. It’s all based on actual growth, he says.

In other industries, Zonts finds there’s still trepidation on the real estate investment front, especially as retailers struggle to fill vacant strip malls along Randall Road.

“The concern is that lease rates have climbed, and there’s a question of whether they’re at a point where a small-business owner who’s renting that space can afford to keep paying higher and higher rents,” says Zonts. “They may be forced to go elsewhere. And, there’s a question of whether there’s a glut of space.”

Challenges within the real estate market are also causing concerns in McHenry County. A fast-growing county when the market crashed in 2008, the area experienced a hard hit to construction jobs. Construction and real estate trends in the county seems to be spread inconsistently.

For Grammer, whose team works the northeast part of the county but also serves Lake and Walworth counties, real estate is rebounding, albeit slowly.

“What we’re seeing is that the business growth is outside McHenry County,” he says. “This county is not coming back from the recession as fast as Lake County or the other collar counties around Chicago. Primarily we do a lot with real estate, and values are starting to come up in McHenry, but not as fast as in Lake.”

Francois sees the same effect in the southern quadrant of McHenry County, though he sees development picking up in industrial and commercial development.

Where he’s seeing a greater effect from the recession is in home equity – a valuable tool for new business starts.
“A lot of times smaller startup businesses occur through people utilizing equity in their homes, which they’ve built up over time,” says Francois. “In McHenry County we saw that equity reduced with the drop in real estate values – and values still aren’t back to their peak.”

Meanwhile, in southern Kane and western DuPage counties, McNamara is seeing a pickup in restaurants, small businesses and multifamily dwellings.

“If you can bottle what Geneva is and spread it, that’s great,” says McNamara. “Our Third Street is great. Our community really gets it.”

Area bankers see a number of signals that support their optimism. For Grammer, it’s the lifespan of equipment. He believes we’re approaching the end of a depreciation stage, and tax savings may incent business owners to quit delaying their purchase.

Zonts believes there’s still a lot of uncertainty, all depending on what happens in Washington, DC. Health care reform, tax reform and other priorities of President Donald Trump’s administration stand to impact regulatory demands, taxes and expenses – all of which can affect staffing and profitability for small businesses and their community bankers.

“From a tax standpoint, for example, if you’re running a business a lot of what you do is making sure you’re being profitable and reinvesting,” says Zonts. “There probably are some tax strategies, so what can you do? How might a simpler tax code affect what you’re doing? How might it affect a new piece of equipment you buy?”

Time to Jump

While the Federal Reserve’s interest rate remains historically low, power is in the hands of those who are willing and able to start or grow their business idea.

“The cost of capital is still historically low,” says Francois.

Looking around his market, he’s optimistic that the stars are aligning.

“When we look at a number of manufacturers and companies we bank, their profits have returned to more historical levels,” he says. “Their balance sheets are as well-capitalized as they’ve been, perhaps, for decades, so they’re well-positioned to continue taking advantage of opportunities with their client base.”