Profit Minded

4 Financial Tips from a Community Banker

Entrepreneur Ken LaRoe had been in the banking industry for more than 15 years when he founded First Green Bank in Mt. Dora, Fla., in 2009. With a mission to promote positive environmental and social responsibility while operating as a traditional community bank, LaRoe says First Green has made loans to a solar-powered catfish farm, an organic blueberry farm, numerous medical practices, and many other small business in Lake County, Fla.

LaRoe calls his community bank the first “values based financial institution” in the eastern U.S., and one of a breed that he hopes to see expand. Small business owners stand to benefit, he says.

On the whole, LaRoe says, the shrinking banking industry has been bad for small business. He points to a Wall Street Journal report that revealed that the number of banks in the U.S. dropped below 7,000 last month, from a high of over 18,000, for the first time since the FDIC was formed in 1934.

Ken LaRoe, CEO of First Green Bank

Though it wasn’t the small community banks that crushed the economy in 2008, many of them failed during the recession. As a result, LaRoe says, regulators “overreacted and made it super hard to make money and super hard to open a new bank.” The way he sees it, fewer banks means an easier job for industry regulators.

Now, he says, nobody wants to start a bank: “Risk is high, potential return is low. Banking is not the place for an entrepreneur anymore, and that’s bad for small business customers.”

Small businesses can hope for more risk takers like LaRoe to open new community banks. In the mean time, Yahoo Small Business asked LaRoe how local companies can survive. He offers four tips.

1. Make sure you are properly funded. At the risk of pointing out the obvious, LaRoe says getting loans is one of the biggest challenges small business owners face today. “Without sufficient capital, businesses cannot afford to make key investments necessary for their own growth and expansion.”

Surely no business owner would disagree, but what’s the solution? LaRoe says banks like his are looking for “a really viable business plan and a viable opportunity.” Business owners, he says, have to work at it: “Have a good budget and a good presentation, and sit down with a banker and prove you have a good plan.”

2. Bank with a community bank. LaRoe says a community bank is the only place a new endeavor is going to get help. “The big banks—they don’t really do banking. I call them Wall Street investment thingies. Even Chase and Bank of America—they don’t do banking business anymore. Only 20-30 percent of their assets are in loans.”

LaRoe calls community banks “the lifeblood and backbone of our small business-based economy,” and he says most businesses are within close geographic area of one. “There is a reason America is so prosperous, and much of that prosperity is based in the diverse community bank model.” He says many community banks go beyond banking services to provide extra education and counseling that enable clients to discover new financial products.

One example, he says, is in the service his bank provides to many doctors in the community. “If a new doctor comes to town and they’re unfamiliar with business practices and what to do or how to do it, we have volumes of financial statements and we can tell them: ‘In this area you could be doing better by reducing your overhead here or there.’ We also know which office managers are good and aren’t, we know all the good contractors, and we can be a resource for their business beyond providing a loan.”

3. Keep your accounts in order. LaRoe says the first place any business owner should start is with a realistic assessment of the business’s expenses and needs. He also emphasizes the importance of hiring a strong certified public accountant. “Most small businesses, even those that do what we consider a substantial gross income, don’t have CPA-prepared statements,” LaRoe says. “You ask for their financial statement and they give you something that’s gobbledygook and you wonder how in the world they are managing their business when they don’t have good accounting.”

To business owners who tell him they don’t want to spend $400 a month to retain an accountant, LaRoe says, “that’s running over a dollar chasing a dime.”

“They’re spending their own valuable time keeping track, or they’ve got an office manger who’s stealing from them, or they don’t have a clue what their cost structure is. They’d make up for that if they retained an accountant,” he says, and adds: “If you can’t afford $400 a month for an accountant, you probably shouldn’t be in business.”

And, of course, he recommends meeting frequently with your banker: “They’re experts in the field and can provide great counsel.”

4. Don’t let financial problems build up. “If something comes up that affects your cash flow, deal with it immediately,” LaRoe says. “Putting the problem off isn’t going to make it go away and will ultimately affect your bottom line.”

During the financial meltdown, for instance, LaRoe says many businesses stayed open way longer than they should have and continued to make payroll even though revenue streams had ceased.

“Another common one we see is concentrating on too few customers. It’s a classic thing, relying on Disney or WalMart or any big buyer.” For instance, First Green Bank has had several customers in the nursery business that supplied the big box stores. “When those stores changed direction, decided they didn’t want that product, or wanted it cheaper or shipped differently, the nurseries just hung in there. Home Depot requires them to reduce their price 10 percent, and then a month later cut 2 percent more. They should have bailed out at 10 percent.” The lesson, he says, is don’t put all your eggs in one basket, or even two large baskets.

A small business has the best chance of success—and therefore of securing a loan—any time they can deliver a product that’s unique from competitors, LaRoe points out. “We have one nursery operator who developed a variety of a northern plant that will grow in the south. It’s not available from suppliers up north. It’s some way to distinguish yourself from competition.”

As for weathering the recession, LaRoe says that among the many local contractors he serves, “the only ones who made it were the ones who stashed a lot of cash away when times were good. We have many instances of contractors who spent their money on a new boat, a new four-wheel drive truck, new jetskis, and the minute the economy turned they were buried and couldn’t make the payments.”

On the other hand, the contractors who survived are “busting wide open” now, he says. “They remained viable and they still had a phone number when someone called and decided to build a new house.”

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