Doing it the Right Way – Building a Financial Base before Driving Growth
In the previous OBDC newsletter I wrote about the need for business owners to build the financial base they need before increasing revenue, hiring new employees and investing in new products. Unfortunately, the majority of small business owners and entrepreneurs fail to take the time to raise the funds necessary to support growth and then simply run out of cash before they can reap the benefits of their hard work. I have been involved in trying to save many such firms but few have been successful as the cash problem is generally too large to be corrected.
There are, however, examples of business owners who have done it right. This article is about one such successful experience where hard work, patience and the discipline to wait before growing paid off. The end result will be a doubling of revenues, new jobs for 35 to 50 professionals and help for hundreds of children in need of educational support services. The company, RT Fisher Educational Enterprises, Inc., (RTF) has been in business for over 10 years, provides a broad range of educational services to school districts, charter schools, colleges and universities as well as direct services for students in need of special services to progress through the educational system and go to college.
RTF has been a client of mine for several years, the founder has built an excellent business, refined her business model and has stayed profitable through the worst recession since 1929 - 1933. In addition, the company’s founder, Robyn Fisher, believed in the need for a well thought through and written Business Plan. Therefore, RTF had invested in just such a plan which made it easy for outside parties, such as bankers, equity investors, business partners and its own core management team, to understand RTF’s Mission and articulate it quickly and effectively to others.
The plan helped differentiate RTF from most other firms of its size. On paper and in person an excellent company, with a strong social mission, an excellent plan and a growing market. RTF should have been easy to finance but that was not the case! The macro-economic problems which started with the Bear Sterns and Merrill Lynch corporate failures in 2008 and was followed by the residential real estate melt down has literally frozen lending to small businesses. The same major money center bank that was eager to lend to RTF in 2006 showed no interest in 2009 despite the fact that the company had grown revenues by 300%, was profitable and cash flow positive.
The same was true for three other banks all of which were supposedly eager to lend to small businesses. The meetings seemed to be scripted. The bankers would express sincere interest in the company, lots of corporate and personal information would be collected, loan packages developed and then sent off to Underwriting for review. Underwriting was always in some distant place, a process that the bankers didn’t seem to understand and the results of which they had no ability to impact. In more normal times the banks’ investment of time and effort in a loan application would result in some offer of credit for the company.
However, in this cycle, the answer consistently came back as no credit at all – a zero! How can a company in business for over a decade, with seven figure revenues and 50 employees be so hard to finance? The impact on the company and its founder were understandably frustrating and trying. The process of seeking funds leaves one open to criticism and it is never easy for a successful entrepreneur to hear the word “No” when it relates to themselves and their company. RTF had to manage its cash carefully since the company continued to grow despite the scarcity of working capital resources. The process dragged on for almost a year and by the end the founder was close to being ready to stop dealing with banks altogether.
However, understanding that funding was a pre-requisite to long-term success we continued the process. This spring the Company was able to craft a relationship with OBDC Small Business Finance for a SBA backed term loan secured by certain fixed assets and a working capital line of credit from New Resource Bank, a new socially responsible lender based in San Francisco, secured by the company’s accounts receivables.
The combination of OBDC and New Resource Bank provided RTF with an increase in net working capital equal to about 1.5 month’s expenses, which represents a reasonable financial buffer for the Company given its size and cash collection cycle. The two new lending relationships provided the foundation for RTF to seek significant new business and, within three months, it had closed the largest single contract in its history. An excellent piece of new business which will essentially double its employment and permit investment in new facilities, lines of business and products. In addition, RTF will also be able to invest in its non-profit subsidiary, the Choose College Foundation, to help promote advancement to college for all students and specifically those student populations which have been historically under-served.
The process took far longer than it should have and required more in terms of time and money than originally planned. However, today RTF has the financial resources with which to drive revenue growth, two new lenders interested in its future success (rather than one old lender with no interest in the company) and a new long-term competitive advantage versus its competition. By 2011, RTF could be more than twice as large as it was in 2009 creating over 50 new professional jobs for Oakland at a time when any and all such positions are in short supply. Patience, dedication and prudence win every time.
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