Room to Grow
Predicting growth preserves capital and maximizes profits
Chad Steadman, Vice President, First National Bank Alaska
I experienced my first real growth spurt in the fifth grade. I think I grew five to seven inches that year and enjoyed being taller than my classmates for several years.
By the seventh grade, I was about 5 feet, 8 inches and towered over some of the smaller kids. I have a picture of myself and one of my best friends—his head barely coming up to my shoulder. I quickly outgrew my shirts, shoes and pants. But the day I’ll never forget is the day my mom no longer “looked down” on me. It was amazing to me how fast things changed.
With that type of growth over a short period of time, there were a lot of awkward moments while my coordination adjusted to the new size. Between youth and adolescence, it’s tough to be ready for the accompanying physical and mental growth. Each of us grows in different ways. I have three brothers, and the growth came very differently for each one.
Monitoring Business Growth
Business growth is not that much different. It’s hard to predict in terms of when and how much is going to happen. For some there is a period of rapid development and then a leveling out into expected sales. For others it’s gradual and consistent, and for some that can be annoyingly slow.
During rapid growth periods, a business is awkwardly trying to find itself and adjust to its new sales size. Over-predicting progress can be a waste of capital and detrimental to a business. Short selling your potential brings about lost opportunity and lost profits.
Therefore, the first step in managing business growth is to anticipate how much will happen and when it will happen. This will help you take the second step, determining the proper path to access capital and fund the advancement of your business.
There are three main ways to fund growth:
- Personal or business equity
- Bank loans
- Investment equity from individuals and investment firms—such as the 49th Angel Fund
The first growth-funding option, personal or business equity, is typically used by firms that are experiencing slow to medium expansion. In this ideal situation, the owner or business has excess cash on hand to be used for purchase of the needed supplies, inventory, capital improvements and expansion of trade receivables that will occur with the new growth. This of course can happen if a business’ net profits are large enough to be reinvested back into the company and either match or exceed the needed expansion. Sometimes the owner of the business has personal liquidity to fund the growth out of pocket, allowing the owner(s) of the business the greatest return on investment without additional burdens of creditors’ or investors’ expectations.
The second funding option is new credit or expansion of existing credit from your bank. This traditional financing option is used for businesses in all the stages of growth, and can range from term loans to provide permanent working capital, asset purchases or capital expenditures for equipment. For short term capital needs, a business can use a banking service that allows companies to outsource payment processing to the bank and in turn convert account receivables into cash in as short as 24 hours.
The path you choose can be determined by assessing your need, your credit worthiness, and your ability to repay the credit facility. The downside of credit is the burden of debt.
With this option, there are the increased requirements like loan covenants, the borrowing of base certificates or the bank requiring frequent supply of financial statements. Local, community banks are usually the most willing to take into account your individual needs and make adjustments as necessary.
The third funding option is typical for high to extreme business growth. Expected growth can quickly outstrip your working capital and requires large upfront capital expenditures. This type of growth requires an outside equity partner. Investors such as these rely on well-written business plans and strong management teams to execute plans. In return for their equity contribution, they typically will require a percentage of ownership and an exit plan to recapture their investment.
With this option, there are two types of investment firms commonly used—a venture capitalist and what is known as an angel fund.
Typically, a venture capitalist wants to deal with young established businesses that are looking to rapidly expand in the marketplace. Angel funds are usually set to take more risk and work with start-up businesses and very newly formed companies looking to grow. Angel funds try to package together capital and advice, while venture capitalists offer funds with expectations.
The US Department of Treasury State Small Business Credit Initiative allocated the Municipality of Anchorage $13.2 million to invest in Anchorage businesses and angel funds. It’s called the 49th State Angel Fund. To find out more go to www.49saf.com.
The growth story of this community business helps illustrate how bank loans can help grow your business.
Cheap Wheels Rent-a-Car has been an Alaskan-owned business for more than a decade in Anchorage.
In 2004, Mike and Cindy Speer pooled their life savings and purchased the business from the original owner.
The Speers received a commercial loan from First National Bank Alaska for the purchase of vehicles. They started purchasing used vehicles wherever they could find them in the newspapers ads, Craigslist and even ones for sale on the side of roads. In a short period of time, they built a rental fleet to approximately 10 vehicles during that first year.
The business began to grow rapidly—the fleet, the revenue and the profits. The relationship between First National and the Speers worked. Today, Cheap Wheels Rent-a-Car has a fleet of 50 to 60 cars and continues to be a successful community business. They could also have sought out investment equity in the form of an investment partnership, but would have had to give up equity in their business and also a share of the profits. In this case, the use of commercial loans was the right fit for the owners of the business.
After my physical growth spurt during my youth, I enjoyed several years of being taller than the other kids in my class. A little height goes a long way at that age and it helped me exceed in athletics. Unfortunately, all great things must come to an end and by my freshman year in high school I reached my max height at six feet—actually it’s officially 5-foot-11.75. But in basketball you always round up.
Oh, and that friend who came up to my shoulder had his growth spurt in high school and ended up 6-foot-2.
Chad Steadman is a vice president at First National Bank Alaska. He specializes in commercial underwriting and lending credit to corporations and commercial contractors. He holds a degree from Utah State University in finance with minors in financial planning and economics. He has a diploma from the Graduate School of Banking at LSU and was commercial banker of the year for his organization in 2008. Chad was raised in Soldotna and has recently returned to Anchorage with his wife to raise his three daughters and one son in Alaska.