As much as most business owners aspire for spectacular growth that drives the top and bottom lines far beyond stretch goals, such rapid success can derail a company just as commonly as it boosts it.
Effectively riding a growth surge requires foresight, planning and discipline to ensure that sorely needed cash is available to bridge the funding gap between piling up the orders and collecting on them.
Many founders and management teams experiencing such an exhilarating ride for the first time turn to a commercial banking team to help them smooth the path to the capital they need and to ensure it remains available.
Consider the firm that recently reached out to Christopher Barone, who leads the Arizona-based BOK Financial® commercial banking market team. Already successful, the company was considering tripling its capacity along the U.S.-Mexico border to capitalize on an expanded free-trade zone, complete with considerable tax advantages.
To make it happen, the business needed to borrow a large sum of money, backed by the owner's personal guarantee, and bring in a handful of new hires. Enter Barone.
"We didn't make any decisions for them, but we shared how we've seen similar companies invest in similar opportunities, develop contracts that allow for potentially large unseen variables and manage the cash flows on certain high-risk receivables," Barone said. "When business owners tap a commercial banker to handle such details, it frees up their time to be successful and focus on increasing the wealth of their business."
Sometimes clients experiencing tremendous growth need help finding solutions beyond bank debt, such as an equity partner, said Melissa Keeling, a Bank of Texas commercial banking market manager.
"Admittedly, it can be a bit daunting to give up a percentage of ownership to such a partner, but a business owner may benefit from patient equity capital or subordinated debt during times of extreme growth," she said.
A sign of maturation
Typically, startup and early stage businesses adequately handle their own finances through a series of business banking connections, which tend to be more transactional. For example, equipment loans and business property loans can be large investments but are fairly straightforward. Such efforts may also suffice for owners who are content with modest growth and relatively steady business models.
When annual revenues hit $5 million and are poised to keep growing, the need for financing can become more complex. Cash flow can become disjointed from the sales-delivery-payment cycle, endangering a company's viability.
"Growth spurts—which can be experienced at any point in a company's lifetime—often create an accelerated need for capital and firms may discover their capital needs exceed what their current bank is able to provide," said Wes Roberts, Bank of Oklahoma commercial banking director.
Business owners that anticipate rapid growth may want to engage a commercial banker to review their financial performance, Roberts said. That review can outline necessary steps to gain and maintain access to the senior debt capital needed to reach growth objectives, he added.
Bankers should also provide guidance on how senior debt capital capabilities align with the long-term needs of the business.
Moving beyond a transactional mindset
Generally, working with a commercial banker isn't defined by a one-on-one relationship, but through an assortment of specialists intent on helping the business client succeed. Your commercial banking team can provide insight and guidance on:
- Effectively managing accounts receivable (AR) and inventories. Large orders warrant celebrations, but cash flow can be constrained if they require an up-front investment in raw materials, and final payment likely won't be received for a month or two following delivery of the finished goods. Similarly, supply chain issues such as transportation bottlenecks or localized interruptions can disrupt operations. A good commercial bank can help ease the strain in either case.
- Finding the right type of funding. Debt vs. equity. Short-term vs. long-term. Senior vs. junior. Conventional vs. Small Business Administration. As a company's capital needs evolve, it will likely tap a broad assortment of sources, and a knowledgeable commercial banker at a financial institution with deep resources will understand the best option—and where to find it—at any given time.
- Prevailing trends. A well-connected commercial banker likely has clients throughout an industry, which allows for deeper insights into how a company's peers are navigating their own challenges and opportunities. Of course, discretion remains paramount, but by sharing best practices—and possibly even introducing clients to one another—a commercial banker can help a company establish relevant performance benchmarks.
"The depth of our client relationships across many industries gives us a set of key performance metrics for successfully navigating growth that serve as examples for clients experiencing it for the first time," Keeling said.
Additionally, a responsive commercial banking team will spot company-specific needs and provide suggestions on how insurance, software and other products and services can resolve issues that may not have surfaced yet.
"Oftentimes, entrepreneurs are very good at a lot of conceptual things: 'I know how to put a product out; I know what my customer wants; I know how to handle them when they're upset; I know how to lead a team,'" Barone said. "But there is a myriad of things that business owners understandably aren't worried about. As risk experts, we can assess issues from a risk standpoint, offer context and explain what they can do about it."
. © 2023 BOKF, NA.