As the economy shows signs of a rebound, the desire for business owners to look into expansion is on the rise.
For many entrepreneurs, the timing seems perfect. Their company has weathered the economic storm and survived. Now the urge to capitalize on low-interest rates, depressed property values and a high unemployment rate is strong for some business owners.
A case could be made that it is indeed a great time for a well planned expansion, as long as the emphasis is on well planned.
With careful preparation and strategic execution, expansion can be very profitable for a company.
More often than not, the passion that made an original business venture successful also led to a great product that required little managerial oversight.
When planning for growth, take a step back and analyze what unintended consequences are on the horizon. Once these issues are addressed, it’s time to approach a banker.
It’s essential to explore these questions:
• Is your business financially sound? Have you recouped your initial start-up investment?
• An expansion requires a variety of resources including capital, time, attention and vision. Are you prepared to provide each of those?
• Have you sufficiently serviced the original market and are you certain that it is now time to explore another location or product line?
• Will your primary business suffer from this expansion? Do you have the right employees in place to maintain the standards of customer service and product integrity that made your business successful?
• Do you have strategic partners and vendors lined up to aid in this expansion?
People including a real estate agent to find the perfect new location, a marketing consultant to protect and promote your brand reputation, a human resources expert to ease the burden of added employee regulations, an insurance agent to make sure your company is appropriately protected and a trusted banker to guide your financial decisions.
At Commerce Bank of Arizona, we carefully examine the business plan, projections and unintended consequences of growth. We also test those assumptions before signing off any loan.
We understand that at times, a banker must play the role of adviser and be comfortable saying, “no” when necessary. It’s always in a customer’s best interest and we base our decisions strictly on what our customers can and can not afford. A bank is not an equity partner; it is a lender that must protect its investors and depositors.
Because we are a community bank, we have a deeper level of knowledge and understanding of our customers’ needs and we strive to align ourselves as a strategic partner, but we must carefully balance the line between advisors and investors to run a successful business of our own.
We cannot compromise our banking principles by lending more or restructuring a loan that is in trouble.
Bankers, eager to help, often pour fuel on the fire by encouraging businesses to grow at irresponsible rates, causing the owners to take on excessive debt. When the expansion is not as successful as the company hoped, they are unable to repay the debt and everyone fails.
We’re happy to see businesses expand, but we want to see them expand smartly over time and not end up in trouble like so many have over the past five years. We want to be your financial partner and succeed, but this means careful attention to managing realistic expectations.
Don’t be discouraged. Well-planned business growth is a positive thing for companies, banks and other strategic partners as well. In our experience, small steps verses giant leaps are always best.
John S. Lewis is president of Commerce Bank of Arizona, a locally-owned community bank specializing in serving small- to mid-size businesses in Arizona.