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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Andrew Tellijohn
February 2005

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Banking: Fancy flavors


Fancy flavors

SBA loans finance deals beyond vanilla, too

by Sarah Brouillard   Small Business Administration (SBA) loans are often an initial shot of vitality into young companies — that first big break for entrepreneurs looking to carve their niche in the marketplace. But they can also be rolled into financing packages for more established small businesses that for a number of reasons, from rocketing growth to unusual inventory, may be deemed too risky for traditional bank loans.

Combining various types of financing, including SBA loans, allows banks to help their growing small-business customers, while still being practical when it comes to their own bottom lines. The SBA, in particular, helps banks divvy up what might otherwise be an unpalatable amount of risk.

“Banks aren’t necessarily in the business to take risks,” says Dan Fagan, vice president of commercial banking at Western Bank, Edina. “We have a responsibility to make prudent loans and get paid back.”

Freeing cash
Vertex International, a Watertown-based company that sells lawn, garden and garage-storage products to retailers and distributors, has a financing package with Venture Bank that includes a line of credit and an SBA loan. The company originally began a relationship with Riverside Bank; after the bank was acquired by Associated Bank, a handful of bankers struck out on their own to form Venture Bank, and Vertex’s owners followed them there.

Early on, the company’s owners financed the company out of their own pockets. As the company has rounded out its product line and gotten in with bigger retailers, growth has taken off, says Dan Hurt, part owner, president and CEO.

Bankers at Venture Bank, however, have been cautious with their recent spate of financing as the company hasn’t consistently had the magical ratio of cash flow, profits and collateral that otherwise greases lending wheels.

As an alternative to a bank loan, the two parties agreed early in 2004 that an SBA-backed loan was the right route to go. It has been used to pump some permanent working capital into the company to pay for such things as new inventory and product lines, marketing and accounts payable, thus freeing up some cash to help pay down Vertex’s existing revolving line of credit.

Vertex is also looking into letters of credit, provided by Venture Bank, to help finance exports to the United Kingdom, France and Germany. Because of the uncertainty that often comes with doing business overseas, letters of credit allow companies to substitute their own bank’s risk for their foreign customers’ risk.

In the meantime, the company will repay the SBA loan over seven years, at a point and a half over prime. The line of credit and SBA loan combined are more than $500,000. “It’s very manageable,” says Hurt.

“We’ll use that to grow to the next level,” says Mark Haug, vice president and commercial loan officer at Venture Bank in Bloomington.

What form the financing will take at that point is still a matter of debate among Vertex owners.

“As our growth is continuing at a pretty nice clip, we still struggle with how do we finance that growth,” says Robert Ray, an Edina-based financial adviser and certified financial planner with American Express Financial Advisors Inc., who’s also chief financial officer and part owner of Vertex.

“If we’re profitable in a measured way, we can do this internally. If we grow any faster, we’ll have to continue to finance some of that growth. It’s the kind of problem we want to have, but we have to decide how do we do that. Is it through Venture Bank? Is it through a combination of other lending sources? Do we go out and raise capital — which we prefer not to do.”

The bank “helps guide us through all of these options.”

Done dilemma
Unlike some of his peers, small-business owner John Gill doesn’t have a financing dilemma anymore. In April 2004, he sold one of his Edina-based companies, Sun Pet Toys, to Omaha-based Sergeant’s Pet Care Products for an undisclosed amount, and used some of the proceeds to pay off all his debt with his lender, Western Bank in Edina.

The rest was invested or pumped back into his remaining businesses:  Sun Hockey Inc., a manufacturer of in-line street hockey pucks and balls, and Twilight Tracer, a new limited liability company that makes pulsating, light-up golf balls for diehard golfers to use after dark. (Gill also owns a holding company, Sun Products Inc., founded in 2001 for his various enterprises).

At the beginning, however, Gill was not an ideal candidate for much conventional bank financing. His collateral was mostly inventory; banks typically are more comfortable using the more liquid accounts receivable. Also problematic was the type of inventory Gill possessed: fetch balls for dogs, and golf and hockey products. Not exactly the most marketable stuff in the unfortunate, if unlikely, event of a liquidation.

“It’s stuff you’d get 10 to 20 cents on the dollar,” says Dan Fagan, vice president of commercial banking at Western Bank. Gill is his client. “If I had inventory that was 8 1⁄2-by-11 sheets of paper, I could go sell those all day long because there is a value to it.”

Extraordinary event
Hesitant to do a traditional bank loan themselves, bankers at Western Bank sought out the SBA to underwrite it.

Ultimately, Gill wound up with two separate SBA loans for his multiple entities. The first was a conventional startup loan given to unproven entrepreneurs. It was transferred to Western Bank from Gill’s original bank (with a balance of $428,000) in May 2001. The second SBA loan, facilitated by Western Bank in 2003, was used to help Gill finance his inventory.

More financing followed. A line of credit, to the tune of $200,000, was also approved in 2001 to cover accounts receivable. Just a few months later, in August 2001, the line was increased to $500,000, with the strategy — just the reverse of Vertex International’s — to help Gill pay off part of his first SBA loan. That goal was accomplished, as Gill paid down the loan to $350,000.

Over the next couple years, the line was increased twice to accommodate changing dynamics in the companies — among them, a shift in sales as the pet-toys business eclipsed the hockey-products business, which fueled a period of high growth, and the spawn of the new Twilight Tracer venture. “The bank was on the ride with us the whole way,” says Gill.

Gill has also been rocked by a series of extraordinary events, positive and negative. Gill’s already gleaming roster of buyers, including Target, Petsmart, Petco and Walgreen’s, got a heavyweight in 2002 when an enthusiastic Wal-Mart asked Gill to supply the mammoth big-box retailer with his popular Sun Pet Toys “Fetch and Glow” dog ball. That product was originally conceived as a flashing, street-hockey product that quickly found a following among pet lovers.

Wal-Mart’s big wet kiss, however, wasn’t entirely unconditional. Buyers there, concerned that his products were too expensive, required him to switch from U.S. manufacturers to Asian ones to bring down his costs and his prices. Doing so, Gill and Western Bank determined, would improve his profit margins and improve the quality of his products.

The transition, however, wasn’t a smooth one. Gill had to build new tools to build all new products. Western Bank brought in letters of credit to handle the new overseas transactions. And a timing glitch made it necessary at first for him to fly a lot of his merchandise from Asian production to his U.S. warehouses to accommodate Wal-Mart’s schedule. It was a do-or-die situation.

“If you don’t ship to Wal-Mart on time, you don’t have them as an account,” says Gill. “They drop you very quickly.” He met the deadline, but the maneuver set Gill back hundreds of thousands of dollars.

Within the first month of shipping product, initial sales exceeded both Gill’s and Fagan’s expectations. Profits for that year, however, finished on the low end due to the unexpected complication.

Legal fiascoes
If that didn’t make Western Bank lenders’ heads spin, a couplet of legal fiascoes did. The first was more of a minor irritation: Another company infringed on the patent of a product Gill had invented. Fortunately, the dispute was resolved out of court, with the two parties cutting a deal that granted Gill royalty payments over a six-year period.

The second legal ordeal was much nastier, taking the form of a shakedown. Just when Western Bank, the SBA and Gill were about to close on the second SBA loan, one of Gill’s warehouses threatened to stop shipping to Wal-Mart unless he paid them more money.

“They put us on hold for accounts,” says Fagan. “Stuff that could cripple a company.” The tense situation had the legal departments of the SBA and Western Bank talking over how Gill’s bottom line might be affected. They ultimately signed off that the situation wasn’t going to have an impact on the company.

Luckily for all parties involved, the outcome was favorable for Gill. A judge in Wisconsin signed a court order to move Gill’s inventory, with trucks supervised by a sheriff, to a new distributor within 24 hours. “I prevailed all the way down the line,” he says.

Gill, of course, is ecstatic over the course of events, culminating in the sale of Sun Pet Toys. And he’s thankful for the bank hanging on through all the ups and downs. “This bank was a real swinger … It can really do the dancing,” says Gill.

“In today’s scope of business you really have to be able to go in lots of different directions, and respond very quickly. And I don’t think a lot of banks could have done that. They did a lot of right things here.”

[contact] Dan Fagan, Western Bank: 952.857.4063; dfagan@western-bank.com; www.western-bank.com. John Gill, Sun Hockey Inc.: 952.935.9140. Mark Haug, Venture Bank: 952.830.9999; mhaug@venturebankonline.com; www.venturebankonline. Dan Hurt, Vertex International: 952.955.2673; dan@2vertex.com; www.2vertex.com. Robert Ray, American Express Financial Advisors: 952.857.1308.