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Issue Date: Vol. 45, No. 5, May 2005, Posted On: 5/9/2005


THE BEST AND THE BRIGHTEST: Shopping Around, Doing Homework Are Keys To Finding Best Bank


Allan Z. Gilbert

I believe that a good working relationship with a bank is the most critical supplier relationship an operator can have. Vending requires large amounts of capital, and most successful entrepreneurs quickly exhaust their personal capital and need to establish a borrowing relationship in order to continue to grow. Unfortunately, very few operators are comfortable with their existing bank relationship. But most continue doing business with the same bank, year after year, despite the discomfort they feel.

I suspect that most borrowers feel intimidated by lenders, if for no other reason than that the lender has the power to say "No." If the lender chooses to exercise this power, he creates a huge problem for the operator. The average operator typically approaches the bank only when he needs money to obtain equipment for a new location or to finance an acquisition. Professionals, on the other hand, approach the bank long before they actually need the money for a specific purpose. They take the time and make the effort to create and maintain a relationship with the bank, so that whenever a need for funds exists, the bank is prepared to make the loan quickly.

Professionals understand that a bank is really not very different from any other supplier. Banks are in the business of selling deposit and cash transfer services, and they also rent the use of their money. They charge fees for deposit and cash transfer services, and they charge interest for the use of their money.

In fact, the only difference between a bank and a product supplier is typically the length of the credit term. A bottler or a coffee roaster may ship you product on open account and expect to be paid within 15 or 30 days. A bank, on the other hand, will typically lend money for a term of years. But make no mistake; both the product supplier and the bank expect to be paid!

Another difference exists in the level of their credit exposure. The risk of loss to the product supplier is capped at the size of the order he shipped. If you don't pay, it is not likely he will ship the next order. A bank may continue to fund loans to a borrower for as long as he remains in compliance with his loan covenants. Thus, banks require (and are entitled to) many more credit protections than the typical product supplier.

Banking is, in fact, a very competitive business. Lenders will trip all over each other to supply you with money, as long as they feel comfortable that you will repay the loan. Banks employ salespeople to call on you; advertise in both print and electronic media to get leads; offer specials, such as reduced fees, to get you in the front door; and they do their best to open branches that are convenient to you - all in an effort to lend you money.

Their marketing problem is compounded by the fact that their product, money, is for all intents and purposes a commodity. The money lent to you by Bank A is exactly the same as the money lent by Bank B. So, although I'm not suggesting you feel sorry for your friendly banker, I am suggesting there is no reason to feel intimidated by him. Banks take no pleasure in saying no to borrowers. They actually look for reasons to say yes, because that's how they make money.

Given all of the above as prologue, let's discuss some of the criteria you should examine if you're considering changing banks.

SIZE AND ACQUISITIONS

In an effort to realize some economies of scale, the banking industry has gone through huge consolidations over the past 50 years. In order to spread their costs for such things as advertising, software development, and marketing over as many customers as possible, and in order to develop the clout to obtain funds at the lowest possible cost, banks have been acquiring other banks at unprecedented rates.

Today, the industry has evolved into three distinct tiers; huge, money-center banks, such as Citibank or Bank of America, with thousands of branches all over the world and billions of dollars in assets; large regional banks that typically dominate an area of the country, with hundreds of branches; and much smaller, community-based banks, with anywhere from one to 100 branches in a relatively small local area.

While even the largest, money-center banks offer loans to smaller businesses through their local branches, I respectfully suggest the average vending operator will be much better served by doing business with a (relatively) small community bank. Vending is a unique business, and very few bankers understand some of the nuances that exist in our industry.

If you intend to establish a relationship with your banker, it is important that he understand your business. The problem is that by the time the loan officer from a large bank finally understands what your business is all about, he or she gets promoted. And you have to start explaining your business, all over again, to a new loan officer.

I went through that process four times before I finally got smart. Your only concern with a smaller, community bank should be, "Can they lend me as much as I need to borrow?"

In fact, most banks have what is called a "lending limit." This is the maximum amount that the bank can lend to any one customer. However, even in the smallest single-branch bank, that limit is typically in excess of $1 million.

When you apply for a loan, it is the loan officer's job to take your application along with the appropriate documentation (credit reports, credit analysis, business plans, financial statements, etc.) and present it to the bank's credit committee for approval. Good loan officers are intimate with all of the bank's credit policies and requirements, and will make certain that your application and documentation meet or exceed the credit committee's requirements. They will not allow deficient applications to proceed to committee, because if one gets turned down, it makes them look bad. By the same token, the committee knows just how professional those loan officers are, so the approval of the loan is a foregone conclusion.

So the key question is: how do you find a loan officer with this kind of expertise and clout? Unfortunately, job titles are no help at all. Almost every employee above the rank of teller, at most banks, is some kind of vice-president.

At large money-center banks, it's almost impossible for a new customer to find a loan officer with clout. New clients are typically referred to the newest, least experienced loan officer. In a smaller community bank, you need only ask for a copy of the bank's latest financial statement. These usually list all of the bank's officers, in descending order, starting with the chairman. Do your best to get an appointment with the individual whose name appears farthest up in that list.

Better yet, find a friend who is a current customer of the bank, and ask him to introduce you. The friend scores points for referring potential new business to the bank; the bank gets a new sales opportunity; and you are assured of receiving a fair hearing because the bank doesn't want to offend an existing customer. Everyone wins.

I recently had occasion to refer an operator, who was seeking a $1.1 million loan, to a community bank. The chairman of the bank was available for the first meeting. I seriously doubt that the chairman of Citibank would take the time to meet with a borrower seeking a $1 billion loan.

WILLING TO LEARN

The average banker knows almost nothing about the vending industry. What little they do know hurts, rather than helps, your cause. For example, they know that vending companies deposit large quantities of coin, which can create additional work and expense for the bank. And they know you want to finance vending equipment; but some lenders find it difficult to accept vending machines as collateral for a loan. You need to take the time to defuse these issues and present all of the positive aspects of your business. In order to do this, you need to find a loan officer who is willing to listen.

The coin problem is relatively easy to solve. The Federal Reserve Bank allows member banks to deposit full, sealed bags of bulk coin, with no need for the member bank to verify the count. As long as you are willing to only deposit full bags, the bank can forward them to the Fed at no additional cost.

The problem of accepting vending machines as collateral for a loan is a little more complex. When a lender accepts an asset as collateral for a loan, he takes what is called a security interest in the asset. A security interest, sometimes called a chattel mortgage, is similar to a home mortgage. If the borrower defaults, the lender is allowed to take possession of the asset, sell it, and use the proceeds to pay off the loan.

In order to perfect a security interest in an asset, the lender is required to file a public document, called a UCC-1, at the state and the local, city, town or county level where the asset is located. This is done to prevent fraudulent borrowers from using the same assets to secure additional loans from other lenders.

Vending machines got the reputation of being difficult to secure as collateral because they tend to get moved around a lot. In the early days of vending, some courts held that a valid UCC-1 had to be filed in the exact city, town or county where the machine was presently located, before the lender could seize the asset in the event of default. Today, most courts recognize that it would be almost impossible to track filings at this level, and they agree that a local filing in the city, town or county where the operator is based will suffice for a valid, perfected security interest.

Of course, the lender is entitled to know where his collateral is located, so many operators provide an equipment and location list to their banks on a periodic basis.

Having defused the potential problems, you need to teach a loan officer who is new to vending some of the positive economics of the vending industry. For example, the fact that the book value of the vending machines on your balance sheet (the original cost less the accumulated depreciation) is much less than the actual value of the machines. The reason is that vending machines tend to hold their value for very long periods of time, but you depreciate them on an accelerated basis. And there is an active, viable market for used equipment.

There is also an active market for vending companies as acquisition targets. This means your customer list and customer contracts could be worth much more than your vending equipment.

Finally, you should communicate the fact that vending is a very forgiving business. If you make a mistake and install equipment in a location with poor sales, you can simply pull the equipment and find a more profitable location. No other retail business is this forgiving.

You also can point out that vending typically offers stable, predictable streams of revenue, with virtually no accounts receivable. It's a cash business for the most part, and this can provide an additional benefit for the bank. Banks are required by law to maintain a fixed ratio of cash on hand to loans outstanding, at the close of business, every day. This is referred to as the bank's legal reserve requirement. On days when they fall short, they actually have to borrow cash from the fed, overnight, to meet this requirement. Most of the bank's customers deposit checks or credit card charges, and the bank has to wait a day or two until the checks or charges clear before counting the deposit as part of their cash. Your deposits count as cash immediately.

SERVICES OFFERED

Because banking is so competitive, when one bank offers a new product, every other bank in the marketplace quickly tries to offer the same thing. I find there is very little difference between banks in terms of the typical services they offer. All banks offer basic deposit, check-clearing and loan services, and the day is coming quickly when cost effective, electronic funds transfer will be a reality. This will eliminate the need to write and process checks for payroll and accounts payable. There is a tremendous cost attached to clearing checks, and the banks are anxious to put this cost behind them.

With regard to structuring loans, most professionals seek a line of credit from their bank, so that they don't have to create a whole new loan every time they purchase equipment. The mechanics of this relationship are fairly simple. A maximum credit limit is agreed to by the parties, and a "warehouse line of credit" is established, wherein the operator submits invoices for new equipment to the bank for payment, as they fall due. The operator pays interest only on this warehouse line, until it hits a mutually agreed upon limit, or until it has been outstanding for a mutually agreed upon number of months. When this happens, the total amount is bundled into a loan package, and the operator begins making principal and interest payments.

While this is fairly efficient, it doesn't address the operator's needs during those periods where he buys less equipment than normal, and cash starts to accumulate. In order to save interest costs, the operator has to call the bank and instruct them to use the cash to pay down a portion of the loans. Or he can instruct the bank to invest the funds in short-term or overnight instruments.

A more efficient structure, if the bank is willing to do it, is a revolving line of credit. With a revolving line of credit, all cash deposited in the corporate account is "swept" each night, and the proceeds are used to pay down the loan balance. Similarly, the total value of the checks that clear the account each day increases the loan balance. Under this type of arrangement, the operator never pays interest on more money than he absolutely needs to borrow.

FEES AND CHARGES

Banks nowadays charge fees for most of the services they used to provide for free. Perhaps "free" is a misnomer. It would be more accurate to say that the cost of the services they provided at no additional charge was built into the interest rate they charged for their loans.

Today, fees are assessed for everything from printing checks, clearing checks and depositing checks through depositing cash in general and bulk coin in particular, to overdrafts, overdraft protection and wire transfers , if you're not careful, you could even get charged for lunch! The fact is many banks, particularly the smaller community based institutions, are willing to negotiate these fees for specific customers. Even if the bank is unwilling to negotiate its fees, the operator should attempt to save on these fees wherever possible.

For example, third-party check printers usually offer printed checks at less than half the cost quoted by banks. I know of one enterprising operator who found a unique way of mitigating bank fees. When he learned that his bank regularly purchased rolled coin from the Federal Reserve Bank to provide coin for its retail customers, he offered to supply rolled coin to the bank at a lower cost than the Fed. He was able to profitably undercut the Fed because he had no additional cost to acquire the coin and no additional cost to deliver it. He collected the coins from his machines anyway, and he was already paying for armored car service to deliver the coins to his bank for deposit. His only additional cost to roll the coins was the depreciation cost on an investment in automated coin-rolling equipment.

SUMMARY

In a highly competitive banking environment like we have today, there is no reason for operators to feel intimidated by a bank or a loan officer. Every operator should take the time to comparison shop, just as you would with every other service or product you buy.

Next month I'll discuss some appropriate loan covenants you may be asked to agree to, and the kind of information you should be sharing regularly with your bank.


ALLAN Z. GILBERT is a pioneer in the application of management analysis tools to vending. He founded New England Vending Corp. (Lowell, MA) in 1959, and led its expansion into a leading regional provider of full-line vending, coffee service and foodservice management. Gilbert founded Data Intelligence Systems Corp. (DISC), a computer software publisher and system integrator for vending, and Lemon Tree Systems Inc. which franchised a vending-and-cafeteria concept that eventually had franchisees in 31 states and Canada. He established Merrimac Financial Associates in 1984, and it made an initial public offering through the New York Stock Exchange in 1998. He then became managing partner of The Merrimac Consulting Group in 1988, offering services related to mergers, acquisitions, appraisal and management evaluation, exclusively to vending, amusement and OCS.


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