by Kathy Hunter

      The economy has slowed; and depending on which expert you talk to, we are either already in or headed toward a recession. So you might think this would be a bad time to expand your business. However, this could actually be an ideal time to do so if you have a plan, stay flexible and have a good banking partner.

Make a Plan
      Before you head to the bank or explore nontraditional financing options, you need to have a clear picture of what your dreams are and what reaching them will take. Although the climate may be right to diversify your business, realize that you might need more time or equity.

      Before you meet with your financial partner, take time to translate your dreams into a business plan, including:

• An overview of the history of your business and plans for expansion
• Marketing strategy
• Biographies for key management
• Historical and projected cash flow
• Sources and uses of funds
• Assessment of your company’s competitive advantages and weaknesses

      Don’t feel obligated to “wow” the banker with volumes of paper. If you are not a financial expert, your accountant can help you with forecasting and industry associations or non-competing peers can help you ground your plan in reality and best practices.

Examine Your Cash Flow
      Your credit worthiness is measured by factors aside from your credit score. The company’s historical cash flow is the best indicator of your ability to pay bills and manage future debt.

      Evaluating your cash flow gives your lender an accurate portrait of your ability to manage the company and its debt. While total revenue is important, bankers focus attention on gross profits and the balance between fixed and variable operating expenses. Armed with this information, your banking partner can better assess your company’s debt tolerance.

Adapting is Key
      From the banking perspective, there is more a polarization than a dramatic deterioration in the overall financial condition of the small business community. Strong small businesses are getting stronger and the marginal are becoming weaker. The difference lies in the financial health of the company’s balance sheet and management’s skill and ability to adapt to change.

      Being flexible allows you to be proactive in dealing with opportunities and threats. As a small business owner, you should constantly evaluate your business practices. A great best practice is to review in detail your total expenses incurred over a one-year period. Look at each line item and determine if the cost is essential or nonessential, variable or fixed. Determine whether you incur each expense in conjunction with a sale or if it’s a bill that you must pay regardless of the amount of revenue your company generates?

      Quickly adapting to change requires the ability to place more of your overhead and expenses in variable versus fixed categories. Business owners can view nonessential expenses as a method to minimize tax consequences.

      Once you’ve landed in a variable environment, you’re much better positioned to take on expansion or rapid growth.

Play the Market
      In this economic climate, banks are eager to help established small businesses expand.

      As you look toward expansion and finding the capital to fund it, the key is keeping an eye on the balance of debt versus equity. While debt allows you to leverage your company’s balance sheet, it has to be repaid. A good tool for measuring the amount of debt you wish to take on is to determine how long you want the return on that asset to be working for the bank versus yourself. Equity, on the other hand, isn’t repaid, leaving all excess cash flow to either strengthen the balance sheet for additional growth or to be distributed to shareholders.
     
      A good small business bank will want to be your partner. That partnership includes a level of risk to both of you. Recognize that your bank is receiving a finite return on its investment through the interest you pay. Therefore, unlike investors, a bank is not in a position to take on significant risk to gain significant returns.

      Ideally, you want a mix between debt and equity that encourages growth and maximizes long-term profits. Startups are typically funded mostly by equity because they don’t have historical financial performance to evaluate cash flow, and because they have limited collateral to leverage. On the other hand, existing small businesses can draw on steady cash flow to fund their expansion off the strength of their current financial condition.

Choose Your Bank Wisely
      Consider that banks travel along the same economic road as you do. Some are better able than others to handle challenges in a struggling economy.

      Finding the right banking partner is the critical path to your expansion. 

     Your banker should be a key adviser and a model for your business—helping you diversify, evaluate opportunities, devise a strategy to find the right mix between debt and equity and explore ways to be proactive.

Kathy Hunter is senior vice president for UMB Small Business Banking. She has more than 20 years of experience managing banking services and integrated delivery systems designed specifically for the small business community. You can contact her at (816) 860-1135 or at .