The Southern Maryland Entrepreneurial Ecosystem: an interview with two of our partners at Community Bank of the Chesapeake
As part of a series of posts on the local entrepreneurial ecosystem, TechFire recently caught up with two of our service providers from Community Bank of the Chesapeake: Patrick Pierce, Senior Vice President and Senior Lender, Charles County and Aaron Fenwick, Vice President, Commercial and Industrial Loan Officer. We wanted to learn more about what entrepreneurs and small businesses need to know about, and can expect from, working with local community banks.
Community Bank of the Chesapeake (CBTC, below) has a long history of serving the people of Southern Maryland and now, Fredericksburg. Started in 1950 as Tri-County Building and Loan, technology has aided the bank’s ability to reach further but hasn’t changed its heart and soul: a friends-and-neighbor’s approach to personal service, financial solutions and warm, meaningful relationships
TechFire: What makes a business an attractive investment option?
CBTC: First, we need to understand the industry. We’ll need to have a good feel for the management team’s capabilities and, especially if they are a startup, we’ll want to see their cash flow. Our job is to mitigate risk: both our risk as well as the business’s risk. The bottom line is that, to do mitigate risk, we need to understand the company’s goals and their ability to repay a loan.
TechFire: What do you look for in a business plan?
CBTC: We do expect to see a professionally crafted, complete business plan. It’s important for business owners to take the time and effort necessary to gather the right information and articulate it clearly. Of course, sometimes business owners come in who have never had the experience of putting together a business plan; we recognize this and want to help them be successful. In this case, we would gladly put them in touch with partners like our local Small Business Development Center (SBDC) expert, Bill Hitte. We might also share the great resources available to help businesses on the Small Business Administration’s (SBA) website, such as their Create Your Own Business Plan on their Starting and Managing a business page.
Back to our role of helping businesses mitigate risk … we want businesses to acknowledge their risks. They might use a Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis to do this or create “what if” scenarios that might include issues such as, “What if our cash flow projections were too high?” or “What if our primary supplier closes their business?” The bank wants to know that business owners have thought through these kinds of scenarios and have risk plans in place.
TechFire: If the plan seems primarily sound, what would keep you from extending a loan?
CBTC: The business plan is a roadmap that helps us see the business three to five years out, gives us an idea of who the management team is, and see projected cash flow three to five years out. But even with a sound business plan, there are issues that could keep us from extending a loan. Those might include an inability to keep a good credit score, a lack of collateral or capital, or a poor industry outlook. Some of those are in the business owners control and they should take steps to mitigate those potential challenges. It’s also important for us to see that the owner has “skin in the game,” that they have personally invested in their business. That tells us that they believe in themselves, in their team, and in their ability to create and run a viable business.
TechFire: What do you look for in the management team that aids in your decision-making?
CBTC: The business plan is a great place to communicate to us that the owner and management team have depth. We need to know that the owner knows how to run a business and has expertise in their industry. Sometimes, the owner doesn’t have business experience themselves. Or they have business management experience but not expertise in the industry. That’s okay, as long as they have a strong team and processes in place that will mitigate those challenges. They may have experience that indirectly relates to running the business; if so, we want to know how those transferrable skills will be applied to their business and how they’ll use that expertise to be successful.
TechFire: With such a wide variety of businesses approaching CBTC, how do you gauge the commercial viability of a value proposition?
CBTC: We’ve mentioned that we need to understand the industry, and of course, we can’t have the most up-to-date information on everything about every industry in our heads. We use tools like Hoovers that allow us to conduct in-depth research and gain the necessary industry insight to help us make a good decision. Understanding the industry helps us gauge the value the business brings to their customers.
We give business owners an opportunity to share with us how they add value for their customers. Our expectation is that they are able to clearly and concisely articulate their value proposition. That helps us get a feel for their ability to understand and communicate with their target market. It gives us a sense that they know their business inside and out – as they should.
TechFire: Under what circumstances might you extend a loan to a new business?
CBTC: Back to risk mitigation, we need to know that a business will be able to maintain their credit and will remain able to pay. While there aren’t hard and fast rules, because each business is different and each situation is different, there are three things we might look at for risk management:
- Cash flow: projected over three to five years but is it realistic? Has the business put thought into different risk scenarios and prepared for them?
- Personal income: does the owner have a source of income, either from a job, current cash flow in the business, or other investment income?
- Collateral: Is the business using collateral to acquire the loan? Is it sufficient?
It’s really important to remember that each situation varies and the risk that goes along with it varies as well. While we may want to discuss all three factors above, in some situations we may only need to understand two. We know that some small businesses show a loss in their cash flow projections in the first year, we understand that. But we need to see a transition and know they’re hitting milestones. It’s not unusual for us to work with a business, especially a startup, and monitor them annually, for example.
TechFire: What do you expect to see in the Financial Plan?
CBTC: We view the business plan holistically; each part is important as it contributes to helping us understand at a strategic level. We want to see a well thought-out plan with a sufficient level of detail. We want to see that the owner fully understands every aspect of the business and how the business will impact the local economy. We want to see competition addressed and know that competitive differentiators have been addressed. We want to understand the business’s human resource plan, marketing plan, management team, advisors, etcetera. The financial plan needs to show how the business will generate revenue, projected out three to five years, month-by-month. We want to know about licensing fees, utility costs, rent, annual membership fees, and any unique expenses. With that level of detail, we can help the applicant ‘stress test’ their financials. For example, were they overconfident in revenue projections? Did they cover any costs necessary to mitigate previously identified risks? The point is, we want to help our businesses create reasonable and strong financial plans that will help them develop a strong business over the long haul.
TechFire: What else would you like entrepreneurs and small business owners to know?
CBTC: Do your research! Both on your business and on your lenders. Have conversations with bankers, interview several, ask your business associates about their experiences … the point is that each business is different with different needs. Sometimes a larger bank might be just fine for a business, but a small community bank like Community Bank of The Chesapeake has a little more flexibility and resources that are aimed at helping community members.
We feel it’s critical for us to participate in the local community, to attend events, to understand the local economy and to develop personal relationships. We all – the bank, our economic development department, our partners, and our local businesses – have a vested interest in the local economy so we do take the extra time to develop personal relationships. We know that everyone benefits when local businesses succeed – we see it happening all over the place in Southern Maryland and we’re happy to be part of that success.
To learn more about Community Bank of the Chesapeake, visit www.cbtc.com