Q&A With Richard Sinclair

Former banker and local financier Richard Sinclair recently opened Correspondent Business Credit, an alternative asset based lending company, with a mission to continue the tradition of local people making local decisions to help local companies through challenging times.

Here he answers some questions regarding small business lending in today's environment.



How long have you been involved with small business lending and what do you define as small business?

I've been in financing since the mid '70s when I started working at what was then Equitable Bank. After 17 years, I moved into asset based lending and started a subsidiary alternative asset based lending (ABL) company in 1992.

My definition of a small business is different from the textbook version; I consider it a business with $100,000-$5 million in annual revenue. The bulk of the companies I have financed over the years are small ventures - around $2.5 million or less, which is the majority of the businesses in the regional market.



When will we see an economic recovery?

I'm confident we are going to feel a recovery in this region sooner than the rest of the nation. Because of the influence of BRAC, Washington, D.C., and our strong health care and University systems, this area should be strong by 2011. Right now, we are simply experiencing a big hiccup of uncertainty.



Currently, much of what we hear from the media is that getting a bank loan is harder than it has been since World War II. Why is it so difficult?

One thing that is happening is people are saying it is harder to get a bank loan, when in actuality, banks are loaning 80% or more of what they were lending. What many business owners may not realize is that lending goes beyond bank loans. Prior to the current recession, banks provided about 40% of the commercial lending in the country. Lending was also acquired from hedge funds, M&A activity, private equity firms, angel investors, mezzanine financers and insurance companies. But many of these options have recently dried up.

There are some non-bank, asset-based lenders who were financed by hedge funds so they are constrained, but others have lines of credit and are looking for opportunities. It all depends on their source of lending capital.

The tide has stopped rising and is starting to ebb. But, the current pessimism translates to everyone who makes lending decisions. Lenders do have less funds, but I do not know a banker out there who is not looking for good loans.



What are banks and asset-based lenders looking for to approve and fund a loan?

A bank looks to make good credit decisions based on cash flow that benefit the borrower, and ultimately, get repaid.

Banks are not looking to take on the risk of the business. The risk of the business belongs to those who have put capital into it. A bank's emphasis is on credit decisions, meaning that it should, if the loan is traditionally structured, expect to be paid back and expect a reasonable return on the amount that was loaned. Banks take a credit risk, not a capital risk. In addition, bankers are trained to require a primary, secondary and possibly tertiary source of repayment. If the business fails in repayment, the bank loses interest, perhaps, but not principal, in theory.

Conversely, asset-based lenders focus primarily on one source of repayment, and that is based on collateral only. ABL is a more expensive option for the borrower, but one that can be used wisely when a business is a non-traditional credit risk.

Overall, the bank is a fine place to be a borrower. But, most small business, especially in the early years, do not qualify for a bank loan because bankers look for capital that is going to be put at risk whether or not the business succeeds. As such, many small companies do not have sufficient capital to qualify.

Early stage businesses need equity partners to secure the best capital and future loans. And, the owners and capital investors of businesses should be the last ones to get paid and have the biggest payday in the end.



How do I get a banker to listen to my story?

Start with the end in mind, and know your audience. Every banker wants to listen to that story. They are people people. They want to be helpful. But, they have to make credit decisions where numbers come together. First, there has to be a very straightforward business plan, not voluminous, compiled by a professional. Even so, the first thing a banker is going to read is the footnotes to the balance sheet.

Think like a banker, lender and investor and present your business in the way those individuals want to see it. Bankers must make dispassionate decisions. So curb your own enthusiasm and increase your capital contribution.



Where is the best place to look for money for your small business?

Banks do not fund dreams without capital. Realize going in that eight out of 10 businesses fail. Raise core capital through yourself, friends, family, other people that love you, people that understand your business or your angel investors. Execute the beginning of a business plan so that the banker/lender can see a prospective business that is working. Show paid in capital and/or retained earnings.

If you cannot secure bank funding and you have receivables, the alternative asset-based lender is a good option, although it is more expensive due to its administrative collateral management. ABLs are more intense in their analysis of your collateral, sometimes reviewing your collateral on a weekly or daily basis, whereas, in a stronger company, analysis is only done monthly, maybe quarterly, by a banker.



What do you believe is the best and the worst way to finance a business?

Before you go to the next stage, always have capital from the resources I've mentioned. Grow slow and steady and retain earnings. Make sure your money stays in the business.

The worst place to borrow is from the IRS by not paying your taxes. The consequences are more punitive and costly. It also produces a red flag for future lenders.



What do you see as the biggest pitfall a small business makes?

Not having one or two outside advisory teams. They play two roles: one is strategic, as in, "Where do you want to be in five years?" while the other is tactical, looking at the best decisions for today. I have seen companies that tend to think that the top line is all that counts, while gross profit margin and the control of overhead tend to get overlooked. This is a recipe for failure.

Quality, volume and yield are the only true variables of any financing company, and without control of any one, funding is in jeopardy. For instance, loan quality, loan volume and loan yield each can be tweaked but it affects the other two. If you tweak quality to cause volume and yield to increase, you may lose your shirt down the road. We have seen a good example of that recently in the real estate and related loan markets.



Is asset based lending the alternative to bankruptcy?

No, but it is a financing solution tool while a company is in bankruptcy because a traditional bank line of credit cannot be used that way. The trick to bankruptcy is the tactical and strategic approach. Asset based lenders can help a company in bankruptcy execute, with a good plan.