The story of two companies and their banks

“It was the best time, it was the worst time, it was …”, well, you get the picture. For the past few months, I have consulted with two separate companies as an outsourced QA companies. Both companies need bank lending to stabilize their businesses and achieve growth. Both companies are suffering from the challenges of economic conditions. Both companies know that they need to invest in processes, procedures, and personnel to grow and achieve the desired benefits for their owners. I would like to tell you how both companies have been working on building bank loans, hiring human resources, investing in in-house systems, etc. in order to develop companies that can realize the desired shareholder returns. But first, some background information.

Company A has existed for more than 4 years. The company acquired assets from its existing business and expanded its business by more than 15% annually in the first three years. Coupled with a strategic acquisition, Company A is nearly twice as large as the business it currently acquired.

The margins were good and the company was able to distribute cash to the owners each year. With the rapid growth of the business, the company has pushed its internal processes and staff to the limit. In addition, existing systems and equipment had to be upgraded to support future growth.

In the middle of the fourth year, Company A’s storm clouds began to form. The company needed to hire additional personnel to manage the growth it experienced and to support the expected continuous revenue growth.

Unfortunately, the rapid rise of business meant that heavily stressed systems and personnel led to quality lapse, resulting in some large customers turning to competitors. In addition, two executives left the company and started competing businesses. They took other customers by offering cheaper prices for similar services. Urgent investments in capital equipment designed to reduce labor costs have been carried out inefficiently, resulting in a significant increase in supply costs. Company A is now losing money and needed to make quick changes to correct the ship. In addition, the company’s current bank debt had to be refinanced to alleviate cash flow concerns.

Company B has existed for more than 5 years. The company was a start-up that allowed owners to bootstrap to achieve recurring revenue levels and enable the company to quickly achieve profitability. Cash flow was the focus and the company was able to return cash to the owner each year. The company was founded by the owner overseeing all strategic initiatives and managing all activities of the company. As the company grew, the operation of the business could no longer be effectively managed by individuals.

In the fifth year, Company B’s owners realized that they needed to involve experienced personnel to effectively manage their business. Previous growth was funded by customer prepayments and the company had no bank debt.

With increasing recurring revenue, it’s time to make the right investments in people and systems to take the company to the next level. Recruitment is critically controlled and happens at the same time as deposits to manage new expenses on a cash positive basis. Opportunities for new customers are expanding and will be partially funded by bank debt in addition to customer upfront payments. Company B is beginning to show a profitable business and needs to make the right investments to manage its growth.

Both companies needed help to manage the difficult times they experienced. So, given their situation, which is fairer in discussions with banks?

Things seemed pretty dark to Company A. Various failures have allowed former management members to start competing businesses, losing customers. We hired too late to alleviate quality concerns, so we had too many employees to support our existing business. Fixed investments, which were supposed to reduce labor costs, dramatically increased supply costs and wasted more cash from the company. Current banking conditions put the company in a position to continue to increase its credit lines due to operating losses. The company had to refinance its existing banking contracts to avoid situations that could cripple its business.