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For Better or For Worse?

Every tire dealer knows that banks have changed, and getting loans and lines of credit is harder than ever before. But with the credit markets loosening and banks looking to re-establish their loan portfolios, the time could be right for dealers to find a new long-term credit relationship.

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When Howard Fleischmann approached his bank of 12 years to finance his tire dealership’s capital needs, upgrades and expansion two years ago, he found that his marriage with the institution had weakened to the point of, well, divorce.

“We could tell that our relationship was deteriorating and we were losing faith,” says the president of Community Tire in Phoenix, in almost matrimonial terms, about his difficulty in getting a loan. “This was not only in our bank, but in the people we had direct contact with at the bank. In short, in our estimation, they had taken their eye off the ball, and it was time to test the waters with other banks.”

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Fleischmann knew there were other fish in the financial sea, so he essentially went bank-dating, with all of the apprehension of a new divorcee back in circulation. After all, it’s a tough, tight market out there, complete with repercussions from bank collapses and the resulting new credit rules.

“We were never expecting to be received with such enthusiasm as we were with the bank we ended up with,” he says. “During our search, it was apparent that some banks were poised with ‘dry powder’ to better assist a local company positioned to grow.”

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In Fleischmann’s case, his “ex” was a large regional bank, while his new one is a smaller local bank that he says better understands the needs of Arizona, his home state. “The only place they write loans is in Arizona,” he explains. “They’re focused on small- to mid-sized companies with good names and good management teams that have maneuvered the (economic) downturn and restructured for growth.”

Now, Fleischmann is once again in a good financial marriage, with a bank whose management team “took the time to learn who we were, how we operated and understood our business,” he says. “Once the bank understood our needs and plans for growth, we were able to reduce our interest rate and double our term and credit line to facilitate our growth.”

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Fleischmann’s story exemplifies perhaps the greatest key to finding credit in a difficult new economic climate. Many banking experts say it’s all about building relationships. But establishing them takes effort on both parts.

Here’s what the “marriage counselors” of the lending world advise tire dealerships do to make the best of the breakdowns in some of our most valued institutions – the financial, not matrimonial, kind.

A Symbiotic Courtship
Yes, the Great Recession and all of those things surrounding it seriously hurt the ability of small businesses – and their customers – to borrow. Lending rules tightened and banks of all sizes worked to clear bad debt and rebuild their loan portfolios.

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But where tire dealers may have thought the credit well totally dry, banks are back in the lending business. There is money to be had, but more than ever before, resetting your credit position is very much about relationships.

“It really is all about relationships,” agrees Daniel Murphy, speaking from a banker’s perspective. “When it comes to getting loans, small businesses have to rely on the authority of their banking institutions. And if they can’t rely on that authority, it’s time to find a new relationship, one with a better understanding of each business’ special interests.”

Murphy, vice president of commercial lending for Ocean Capital in Rhode Island, says that such relationships can, in many situations, be best found in smaller local banks, as in Fleischmann’s case. “A lot of times, a local bank has a better perspective on the needs of a community,” he explains. “They understand the demographic and are willing to take a greater risk in their own community.”

But some national banks have responded to that growing perception with elevated lending volumes to small businesses and a concerted effort to appear more accessible to them.

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Chase Business Banking, for example, has pledged to maintain heightened numbers in small business loans through at least 2013, according to Reece Smith, Chase’s vice president and area manager for business banking in Southeast Michigan. “Chase sees small business as the engine of the economy,” he says. “We lent $17 billion to American small businesses in 2011, up 52% from 2010.”

Ernest Manuel, senior vice president at KeyBank’s middle-market banking team in Cleveland, Ohio, agrees. “Banks are looking to lend money,” he says. “It really has never changed. Well-run companies with solid balance sheets and good cash flow are able to access the credit markets anytime. Banking is a relationship business, so if a company has a good relationship with its bank, it should be able to obtain the capital it needs. If not, we’d love to talk with them.”

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At least one tire dealer, however, says he might appreciate a phone call himself. Mark Griffin, president of Tandem Tire and Auto Service in Iowa and Wisconsin, says he sees the standard issues of equity-to-debt ratio, good cash flow and the ability to repay loans as expected hurdles in the lending process.

“Banks are in it to make money and limit risk,” he says. “Today, they tie you up. That’s normal procedure to me…I don’t think it’s done any other way today. If it is, call me.”

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While Griffin says he maintains a good relationship with his bank – a local one from which he has successfully obtained lines of credit and equipment loans – he also says he has observed a more difficult en­vironment around him. “I am sure, depending on the circumstances of the business and the mar­ket it’s in, finding credit has become difficult. A good track record and living in an area that hasn’t seen as much of the ups and downs in real estate or failed businesses is a plus. Having said that, all banks have tightened their policy, and money has been tighter. If you have a business plan, equity, good cash flow and profits, there has been no problem. Outside of that, creative financing and bigger guarantees most likely will be needed.

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“That’s why building a long-term relationship with a bank is key,” Griffin says. “We all have good times and not-so-good times. You need a bank that will ride the ups and downs with you. As long as you’re proactive with them, create and implement a business plan that is showing progress, and you communicate consistently without them tracking you down, the process is smooth.”

It Takes Two to Tango
 All relationships do indeed have at least two participants. And if banks are willing, if not anxious, to form them with small businesses, banking experts say such relationships not only are more easily initiated, but will function more smoothly if business owners do certain things.

Ocean Capital’s Murphy lists several of them, beginning with establishing relationships not only with bankers, but also with accountants and attorneys, whom he says can help in times of financial need. But a close-second tip is the need to be organized with the documentation required by such professionals.

“It’s just a matter of being organized and prepared, whether in an electronic or physical format,” Murphy says. “A lot of the hoops that people perceive, or the obstacles they face in getting loans, come in the form of paperwork or documentation. But part of being successful in business is being organized.

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“Just take 30 minutes,” he emphasizes. “Take the time to organize and find all of the documentation you need.”

Among the paperwork typically required by lending institutions, he says, are three-years’ worth of tax returns, interim financial statements and, in the case of tire dealerships and auto shops, environmental reports. “If your site has environmental issues, perhaps with oil or tires, it presents a risk in providing a loan,” he explains. “You need to have that Phase One environmental report.”

Murphy also suggests tire dealers create a clear personal financial statement or balance sheet detailing their assets, from property to 401K accounts. Such documentation can ensure lenders of the assets that dealers can leverage.

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Finally, presenting a fiscally-viable business plan in writing also helps, and it should be thorough and bas­ed on industry knowledge. “Today, you’re seeing cars on the road at a greater mileage,” Murphy hypothesizes. “People are replacing parts and tires so they can keep their cars on the road longer because of the economy. Tire dealership owners need to constantly assess such situations in their industry, every three or six months or so. Otherwise, they’ll say, ‘Sales are down! What happened?’ You have to recognize what’s happening in your business and adjust your costs.”

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Once a dealer’s documentation is in proper order, he or she can begin to weigh what the bank has to give to the relationship. To that end, Murphy advises that small-business owners deal only with institutions offering realistic terms and interest rates. “If it’s too good to be true, it probably is,” he says. “And get it in writing so you fully understand what the terms are. You’d be amazed at what people aren’t aware of, and the next thing you know, they’re falling all over these hurdles.”
 
Alternative Relationships
For tire dealers who, for whatever reason, can’t present their businesses in what a typical lending institution might consider a positive light, other funding options exist. Most notably, the U.S. Small Busi­ness Administration offers a variety of loan products to qualifying small-business owners who don’t meet their bank’s lending criteria.

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“The SBA guarantees loans from commercial banks that provide the capital for the business loan,” ex­plains Chase’s Smith. “This way, the financial institution will lessen the risk taken in extending the credit. An SBA-preferred lender like Chase also can process the loan application faster.

“If you can’t get a business loan through other sources, the SBA might be a good option,” he adds. “Chase often offers special incentives that make SBA loans more att­ractive for borrowers…(like) paying the loan fee, which typically is 1% of the loan’s value.”

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“There’s been an increase in de­mand for SBA loans, as they’ve become part of our vernacular with the Obama administration pushing for job creation,” adds Ocean Cap­ital’s Murphy, listing products with names like SBA7(a), 504, and ex­press loans among them.

In addition to SBA loans, Smith says tire dealers can use collateral to back a loan, in the form of certificates of deposit, non-retirement brokerage funds or savings accounts. “And business owners also should talk with community organizations, like SCORE and Small Business Development Centers,” he advises. “They may be aware of funding and government programs such as enterprise zones, which offer tax incentives.”

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“Each business has different fin­ancial needs,” summarizes Key­Bank’s Manuel. “So, based on those needs and with help from the business, a banker can assess what’s possible finance-wise for that business. Some businesses are asset-heavy and can rely on assets for finance. Others are more cash flow-oriented and can rely on that. There’s no one answer for any type of industry. It’s all based on the individual company’s situation.”

The choices available in non-traditional financing also depend on a company’s size, Manuel says. “Those with earnings before taxes, interest, depreciation and amortization above $10 million or $15 million have a broad range of options, from subordinated debt placements to private debt placements to equity raises,” he explains. “Companies below that range don’t have as many options and rely mainly on the banking in­dustry, some smaller sub-debt pro­viders, smaller equity groups and angel investors.”

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Indeed, the options in alternative financing seem as complicated and steeped in jargon as they are plentiful. That’s why Smith suggests tire dealers build a relationship with a banker specializing in small-business lending. “That kind of banker will become an invaluable resource and help the business owner make informed decisions about the best options,” he says.

Of course, in the age of online relationships, Murphy also suggests one other resource: “Use the In­ternet as your friend,” he says. “Use it to research what’s out there. You, as a business owner, should dictate where your business is going, not your bank.”
 
What the Future Holds
So, what can tire dealers expect from the credit market in the long run?

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“Credit is available today and will be for the foreseeable future,” says KeyBank’s Manuel. “Banks need to rebuild their loan balances with quality borrowers, so they are eager to lend. Governmental oversight for the banking industry remains high, so banks need to provide solid fin­ance as Big Brother is certainly watching.

“Again,” he says, “companies with good relationships with their bank, who have historically kept the bank informed as to what is going on with their business operationally and financially, are normally able to raise capital to fund their business. It goes back to being a partner with your bank.”

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Meanwhile, Chase’s Smith sees the recent past as a good indicator of future trends. “For the past three years, Chase has exceeded annual small-business lending commitments,” he says. “We are making credit available to qualified small businesses.”

“Right now, interest rates are at a historic low,” Ocean Capital’s Murphy adds to the positive outlook, “and in 2012-13, we don’t see them as going up. That’s going to make credit more affordable.”

As for Fleischmann, he simply remains a witness to the power of a good financial wedding, regardless of external circumstances.

“As we have all experienced, the banking market has changed dramatically,” he says. “However, many banks are still positioned to provide funds for companies that have weathered the storm…It’s my personal opinion that businesses having difficulty with their banking relationship could simply be partnered with the wrong bank.”

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May he take his financial marriage – as may every tire dealer – from this day forward, to have and to hold, for better or for worse, and especially for richer or for poorer.

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