Capital Pains

How can America recover from its financial crisis if its businesses can’t get access to capital to help them expand their plants, upgrade to more efficient equipment, hire more people and grow the economy?

That conundrum is among the fallout of this frightening economic cycle. The pain on Wall Street is now being felt on Main Street. After all, they are intrinsically linked.

A recent national poll by Harris Interactive found that 63 percent of American small-business owners are feeling very or extremely concerned about the economy. According to the poll, business owners’ second-most common concern is access to cash.

In today’s market, it can be tough, and in some cases seemingly impossible, for businesses to borrow money.

William McGinnis, a chartered financial analyst and founder of W. McGinnis Advisors LLC in Milwaukee, said many companies are finding it increasingly difficult to gain access to extra capital when needed, even for basic needs such as payroll.

“I think the biggest risk is the credit collapse … We’ve got to get that moving again,” he said.

Thomas Klink, president of Jefferson Electric Inc., a Franklin-based manufacturer of electric transformers, was recently awarded a contract that would increase his company’s sales by 25 percent. However, he was not able to obtain a loan from his current bank to increase his workforce and purchase the materials and equipment needed to ramp up production.

“Proportionately to the size of the contract, I need less than 1 percent (of the contract) for equipment,” Klink said. “The lender, before I bid on the contract, I spoke with them. I had to, in the bidding, indicate that I had the operational and financial wherewithal (to fulfill it). The lender’s response was, ‘We’ll find a way to get it done.'”

However, after Jefferson Electric won the contract, things changed. Klink’s lender, whom he declined to identify for the record, recommended that he find a private equity firm to invest in his company and help fund the necessary equipment and employees.

“The bank has moved from a partner in this endeavor to much more of a terms maker,” Klink said.

The company’s new contract started about two weeks ago. Although Klink was able to negotiate a 60-day reprieve, he is not confident that his company will be able to find an alternate lender in time.

“There are penalties in the contract for failure to comply with it,” he said. “I’m in kind of a rock and a hard place. I’m reaching out to capital market people, looking for other options and other sources of cash.”

When Jefferson Electric won large contracts in the past, the company easily was able to obtain financing, Klink said.

“I’ve gone to the bank with less (than this) and shown them a signed agreement, and I’ve almost had line extensions on the spot,” he said. “The response at this point is almost flabbergasting. It’s like, ‘What?'”

Jefferson Electric was named one of the Metropolitan Milwaukee Association of Commerce’s Future 50 companies in September. The company expects about $28 million in revenues this year, and the new contract would grow revenues to about $42 million in 2009, Klink said.

Tina Chang, chief executive officer of Brookfield-based SysLogic Inc., a custom software and consulting firm, has heard from many of her peers in the local business community about the difficulty in obtaining bank financing today. Some banks are requiring a greater amount of personal guarantees from business owners, she said.

“What might have been possible without a personal guarantee or an assignment of personal assets, (banks are) now looking to define with assets,” she said. “Banks are looking to back loans with securities or assets that can be liquidated.”

Regardless, Chang believes there are still banks that are lending money to qualified businesses, and SysLogic is still pursuing traditional bank financing for its future expansion.

“I still believe that our needs are bankable,” Chang said. “It’s about exploring different ways of getting there. And that does not mean that we haven’t explored other alternatives.”

For Chang, those alternatives could include finding alternative lending through sources such as the U.S. Small Business Administration or even selling equity in SysLogic to a private equity firm.

“Sometimes a business will need to be smarter about the other parts of the business to be able to afford taking on more expensive debt,” Chang said.

Despite the nationwide financial crisis that is affecting banks large and small, some banks are still lending to commercial clients.

Superior Health Linens LLC, a Cudahy-based commercial laundry that serves the health care industry, recently obtained more than $2 million in financing to expand the business, said Scott Reppert, CEO.

Reppert’s lengthy relationship with Associated Bank helped smooth the transaction, he said. However, he said it was made even easier because PS Capital Partners, a private equity investment firm in Milwaukee, purchased a stake in Superior Health Linens last year.

“If you don’t have a relationship with an outside investment partner, now is definitely time to be thinking about it,” Reppert said. “By having that relationship, even though you’re giving a little of your ownership away, it gives the bank another level of oversight in the business. It’s one more layer of oversight and one more layer of confidence (for your bank). And that changes the nature of borrowing from a bank.”

The financing from Associated Bank will enable Superior Health Linens to open a new location in Batavia, Ill., which will serve the Chicago market. The new facility should be open by the start of 2009. Superior Health Linens now has 185 employees and should have about 240 within the next 12 months, Reppert said.

“We’re growing at over 12 percent this year and for 2009 we should grow at least 30 percent,” he said.

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