Question
I see that you started out as a farm partner. How did you get from that position to where you are now?
I grew up on a dairy farm in New York. After attending Cornell, my first job was working for the federal government for what is now called Rural Development in at a farm loan program. The family farm expanded and I went back and worked there. Things didn’t work out quite the way I thought they would. So then I got into banking, specifically ag lending. New York State is one of the leading dairy producers in the country. Agriculture is a big banking business in New York because farms are so capital intensive. From there I went across to a local bank and became more involved in commercial and small business lending.
Question
I am interested in agricultural operations, specifically poly-cultures and perennial food crops. In a situation like that, revenue may not begin flowing until five years down the line. Do you have experience in financing these types of operations?
It’s a business like any other. Apples and grapes come to mind. Or even a horticulture business where perennials are raised for consumer use. Cash flow begins a few years down the line and you need to account for getting from here to there. This requires resources and the barrier to entry is that much more challenging.
Question
Have you found it is more challenging for agricultural customers to establish a solid business plan and a convincing set of assumptions when seeking financing?
Yes, it is challenging. As a banker, we want to get paid back. Income is important. In the early and mid 2000s, a lot of lending was done in a speculative nature for land and development. In the case of purchasing, say, a 200,000 dollar house and selling it the following year, the earnings were gained from the sale, there was no ongoing income.
Question
What were some of the challenges that you faced when you started out as a lending officer? How does that inform what you do now?
Having the benefit of hindsight, I am able to look ahead to what might be the pitfalls or the probability of success or failure for a given business or situation. It is much easier now understanding the cycle of a new customer/new business moving to some success and then moving, maybe to an event that leads to the dissolution of the business. A have a better sense of what might go wrong so that we can anticipate issues and either mitigate them from the start or have the customer think about those things.
Question
Let’s say a start up has a proposal and you see problems that may need extra attention. Describe the process of addressing these problems with customers.
Everyone is unique. I’ve worked over time with a lot of different situations. Let’s say a customer comes in who says ‘I think we have a need for a donut shop in town and I’m going to open one. I haven’t done much work, but I’m going to need 75,000 dollars. I’ve got a thousand.” I try to point out the need for research. In most cases I wouldn’t have the time to sit down and go through the development of a business plan. I would refer them to the small business development center or AB Tech.
So, to have a successful business requires expertise in a bunch of different areas. The exercise of developing a business plan is important. In my mind, if you can’t get through building a business plan, then how are you going to run this business? Even though you might be a good donut maker, doesn’t necessarily mean you can wear the five hats needed to operate a business.
Question
For the customers who walk in with fully developed business plans, what do you most often see out of sync? What are common errors?
Over-optimistic budget. That can take various forms. Take unrealistic level of sales: recently we looked at a restaurant. They figured so many lunches, drinks, dinners at X dollars. This is an important part of the business plan. But if someone says they’ll get eighty lunches and one hundred dinners each day, six days a week. Maybe its realistic, maybe its not, but it is very optimistic and this is could be a problem.
Question
Even with good information, forecasting demand can be unreliable, and becomes more so when forecasting further and further into the future. When you see a forecast like that, it sounds like a certain amount of intuition is necessary. How do you measure the reliability of forecasts?
Depending on the scope of the business plan, some need to have market studies done. Take a rural low-income housing development, for example. A market study would need to look at average income, family size, how many people live in the community, existing low-income units. This all points to demand. It’s fairly straightforward.
Question
Are there ever situations where your company needs additional opinions, say from a consultant, when dealing with industries that you may not be familiar with?
That is generally not necessary. I would assess that kind of research and make sure it makes sense. We try to take all of those pieces and add them to the mix of our underwriting and analysis. This includes the industry, the market, and other components of the business proposals.
We can look at industry averages for things like cost of goods. If someone projects that cost of goods is 25 percent and a margin of 75 percent and I see that the industry average is 35 percent for cost of goods, that is a big difference. If you get this one wrong, it makes a big difference in the bottom line.
Question
Would you recommend leaning towards over-estimates on cost of goods?
Sure. Or at least do some research and figure what the high-end would be. It doesn’t hurt to look at this and if it still gets you where you want in your projection, then why not? I just want realistic estimates.
Question
You must have a lot of people who show up and say, “I’m sure everyone is going to love this. They just don’t know they love it yet.” Do you experience a lot of these customers and how do you respond to that.
I have not had many customers like that. And if the product were so different or unique, the risk would be way beyond the scale of what a bank would consider. Where I’m from, Buffalo farming would be something along those lines. It’s like beef farming, but it’s a little different. That would be more appropriate for something like the SBA rural development, or Mountain Bizworks. And if the customer comes having already secured some loans, let’s say you’ve got fifteen and someone else puts in thirty-five, the bank is left with fifty out of a hundred. That makes it much more comfortable than eighty-five out of a hundred.
Question
Even if there is considerable risk?
Yes.
Question
How does your lending operation work? Is there a specific team process to review business plans and loan applications? How long does it take?
We have somewhat of a well-defined process, but it is also a case-by-case process. I’m fairly new at this bank. The process is still being refined. With customers, I generally want to avoid a prompt indication of willingness. I’d rather tell you, “no, we aren’t going to fund your ostrich farm” than drag you along for a month.
Question
How is a final decision made on a lending decision?
It’s me or the chief lending officer or a committee basically, depending on the size.
Question
Is there a method of resolving conflicts?
The chief lending officer has the final say.
Question
How do you keep up with best practices in the banking industry?
There are groups like the RMA (Risk Management Association) that publish periodicals. They provide coursework and training for different types of industries. We have certain groups and businesses come and provide informal trainings. We had an environmental firm come in recently for a luncheon. They go over regulations and things like that. They are, of course, trying to sell their services, but it is a service that we need.
Question
What kind of education or experience would you recommend to someone who is interested in your line of work?
I’m not sure if there is a real good answer to that question. You can’t go to a four-year college and get a banking degree. Its one of those interesting things you have to just do. I have an intern who has a degree in finance, he’s worked as a teller, now he’s doing some finance work here. Myself, I’ve learned by taking many classes and other available opportunities from being in the industry for many years. There are some schools called Stonier school of commercial banking or the NC school of banking for professionals to expand knowledge base for a weeklong program or weekends over a few years, things like that.
Question
Are any elements of a business plan, when looking at loan requests, that you find are often out of sync other than over-optimism and on the flip side, elements that tend to be quite solid across the board?
To go along with the budget being over-optimistic, the estimate for the capital needed is often underestimated. It’s pretty easy to say, for the Donut Shop, that you need a mixer and a freezer and some benches and counters and so on. But what’s not often accounted for is that on day one, you need a couple thousand dollars worth of flour and other materials. And for six months, you won’t have enough sales to cover your variable costs. Thirty days from opening, the business owner realizes he doesn’t have enough money.
Working capital is underestimated. Say you see a used donut fryer that costs ten thousand dollars, but really you’ll need fifteen thousand for repair or upgrades. So all of a sudden we’ve spent through all of our money. Contingency, working capital, it always cost more – it’s no different for building a house or donut shop, it always cost more.
Question
Are there often hidden costs that customers often overlook?
Depending on the complexity of the business, there may be legal costs, accounting costs, consultants. These are often left out. That’s when I say, “you have a good start but maybe you want to talk to the small business center…”
Question
Do you find certain businesses or industries have consistently good applications?
It’s more individual specific. It’s not quite an industry thing. One situation that tends to be simpler is a franchise business. I’ve had some experience with the Snap-On tool business. There are a lot of resources that go behind that type of deal. It is a pretty significant investment, but they want that sales person out there selling tools, so they provide help with the budget and costs and break everything down. It helps reduce the risk. There’s familiarity with the brand and so on.
That reminds me, another aspect that tends to be weak (in a business plan) is a marketing plan. How are you going to tell people that you’ve got the best donuts in town?
Question
Do you expect a specific level detail to a marketing plan?
I expect a plan. That goes beyond just advertising in the local paper. It’s what the sign looks like, the logo, it’s a mailing strategy, things like that. Again, marketing is one of the hats that you needs to wear. You can be a good donut maker, but it doesn’t matter if your not selling.
Another area is the underestimation of the capital contribution, the personal equity needed, to make something successful. Take a look at a ‘hundred’ project, if fifty is personal equity and fifty is financed and then we have a situation where eighty is financed, and equity is twenty. What’s the higher probability of success? With the fifty-fifty, there is more at stake, less payments.
Question
Do you find in your experience that the person who puts up fifty (as opposed to the person putting up twenty) will put in that much more effort?
Well, they have more to lose. This person (who puts up the twenty) may be just as capable and successful as the other (who puts up fifty). But from a bank’s standpoint, from a management standpoint, greater leverage is much more acceptable. It’s important to be prepared with some money up front.
Let’s go back to the case of the orchard where selling doesn’t begin until five years later. Something has got to get you from here to there. The bank may loan money for the trees, but there must be some payments and provision in the interim. The bank is not going to wait five years for interest only until we start seeing something. Other income is something we need. So there is more capital needed there than say planting strawberries in May and harvesting in July.
Character Capacity and Collateral: willingness to pay, ability to pay, and then, if you can pay. That’s banking 101.
Question
Is assessing character an intuition-based practice?
That’s measurable. It includes things like management ability. Experience: “Have you made donuts before? Worked in a donut shop” etc. But credit score, repayment history, these are indications of willingness to pay.
