In a booming economy, with money flowing freely and banks clamoring for your business, you wouldn't think that the lender-borrower relationship could turn ugly. Yet that's exactly what happened to Roger Jacobs (an entrepreneur whose name has been changed), owner of a small cafe in the ski paradise of Mammoth Mountain, California.
In 1996, Jacobs shopped for funding for his new restaurant at a number of local and national banks. He settled on one that had a history of lending to the hospitality industry. "I felt confident that the loan officer understood my business, and he seemed willing to work with me," says Jacobs.
The restaurant business, especially at a ski resort, can be seasonal. Jacobs would often fall behind in his loan payments in the summer, only to catch up in the winter. "This arrangement was fine for the first few years of the loan," explains Jacobs. "Then the loan officer left and things began to fall apart."
In addition to that officer's departure, a new branch manager came on board, and it was someone who didn't seem interested in making loans to restaurants. Jacobs began receiving letters from the bank threatening foreclosure when he fell behind in his payments in summer 1998. "There was no attempt to understand the cyclical nature of my business; they played it straight by the book," says Jacobs. "I got the distinct impression they were no longer interested in continuing the relationship. I didn't change the way I did business with the bank; the bank changed the way it did business with me."
The bank continued to put pressure on Jacobs, seeking extra collateral and refusing to extend his credit line, so Jacobs had to seek legal assistance to work out the impasse.
David R. Evanson's newest book about raising capital is called Where to Go for Financing Your Business(Bloomberg Press). Call (800) 233-4830 for ordering information. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public and is a member of the National Advisory Committee for the SBA.