Suppose you had $250,000, or $500,000, or even $1 million to loan a friend who wanted to start a business.
You would want to know exactly what’s happening with the company, wouldn’t you?
Steve Wolever’s banker, Charlie Wharton, senior vice president of KeyBank NA, says that’s exactly how a bank feels when it lends money to a business owner. In Signature’s case, Wolever involved Wharton in his plans to make a big investment in his company from the very beginning.
“Being involved with the entire process from start to completion made it a whole lot easier, so that when we got financial information, it was expected,” Wharton says.
To prepare for the loss, Wolever says, the company needed a good financial plan.
“We try to do forecasts really negative and really positive,” he says. “We do 12-month forecasting every month for the next 12 months so you know what effect decisions you’re making today are going to have. Without that, it’s more of a gamble than a plan.
“If we made cuts in anticipation of the loss, our services suffer because we don’t have a lot of pure administrative departments. One thing we didn’t sacrifice was in the sales area — that’s our lifeblood.”
For a period of time, Signature didn’t bring on any new hires, but Wolever didn’t have to lay off any employees, either.
“We had lot of people doing lot of multitasking, and as we grew we were able to separate out some of those tasks to separate jobs,” Wolever says. “We’re a people business — 70 percent of our expense is just in labor. The unfortunate part is there’s not a lot of belt tightening that you can do.”
Signature was fortunate, he says, because KeyBank supported the plan and maintained the company’s line of credit.
“That’s how you fund that kind of thing,” he says, noting the company was able to borrow based on its large accounts receivable fund, which today is more than $2 million.
In addition, the company doesn’t carry a lot of debt. And because of its stability, the timing of the decision to lose money was good.
“A few years before that, we couldn’t have done it. We had set a foundation to be able to ride out a single year like that,” he says.
“They had been profitable prior,” Wharton says, “and had built up a big, strong balance sheet and could stand a one-year loss.”
Wharton agreed with Signature’s game plan to expand into a certain type of market at least in part because of its past record.
“They already had experience. They had contacts,” he says.
Signature executives also had talked to their clients and some potential clients about their idea, so they knew prospects were good.
“They had to gear up with space, people, computers and technology to do that, but they already had some expertise in that area and had some contracts with some major players that would start kicking in,” Wharton says.
He suggests that business owners who want to invest in their companies but know there could be reduced profit or even a loss as a result should do enough planning to keep everyone from being surprised.
“One of the best things any business, and small business in particular, can do is work with their bank, their accountant and their attorney as a team and talk about what they’re doing, what effects it’s going to cause short term and why they think it’s going to have a very positive long-term effect,” Wharton says.
Along the way, Signature gave Key updates on the status of the new business, another move Wharton recommends so a bank doesn’t end up having a knee-jerk reaction and pulling out of the deal when it sees losses it didn’t expect.
“If we’ve got more money into the company in lines of credit or loans or whatever than the actual business owner does,” Wharton says, “we’ve got a real right to be involved with the decision process on what’s going to happen.” How to reach: Steve Wolever, Signature, 766-5101, ext. 2801 or [email protected]; Charlie Wharton, KeyBank, 460-3433 or [email protected]