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Banking And Finance
A light at the end of the tunnel for LED innovation
Kitsap firm to start manufacturing new high-intensity replacement bulbs after community bank provides financing that other lenders wouldn't

Jeff Reynolds, right, a senior vice president at Kitsap Bank, was instrumental in arranging an SBA loan for Rick Flaherty's company to begin manufacturing a new kind of LED replacement bulb for industrial lighting.A convergence of factors led to approval of a loan for a Kitsap County manufacturing company that had sought unsuccessfully for months to secure financing to start production of a breakthrough LED product it developed for industrial lighting uses.

About a year ago, Rick Flaherty returned from the Lightfair International trade show in Las Vegas, where the HI-Lamp prototypes exhibited by his company, Differential Energy Global (DEG), got great reviews. They drew attention from lighting distributors who were potential buyers of the highly energy-efficient LED bulbs, which can be installed as replacements in existing high-intensity discharge units without the cost of replacing the entire lighting fixture.

He hoped the boost from Lightfair would strengthen DEG’s hand in applying for a loan to take the new products to market, but much to his dismay that didn’t happen. DEG’s development of this innovative product with potential for global impact, and Flaherty’s frustration over a string of near-misses with a host of commercial lenders and other financiers were reported in the November 2012 Kitsap Peninsula Business Journal.

DEG took its booth displaying HI-Lamp LED bulbs to the Lightfair International trade show held April 23-25 in Philadelphia.Earlier this year, the stalled effort to begin production was revived when Kitsap Bank approved a Small Business Administration-backed loan of about $500,000 for DEG.

“I have to give Kitsap Bank credit in a big way,” Flaherty said. “Not only did they step up, but if they had not, we probably would have mothballed this project for some time.

“This was a lifeline, and if we had not had it, we would not have gotten to the finish line.”

Before he left for this year’s Lightfair show held April 23-25 in Philadelphia, Flaherty said third-party testing should be completed soon to certify that the HI-Lamp bulbs meet performance and quality assurance standards. Then DEG would begin manufacturing them at the Port Orchard plant of Leader International, the company he and his wife, Cathy, have owned for 23 years.

Flaherty and Kitsap Bank officers said personal relationships helped make it possible to put together a deal after numerous other lenders passed on providing a production loan to DEG. Another factor was Kitsap Bank’s expanded focus on sustainability, both in its own operations and in the local businesses to which it provides loans.

The notion of “relationship banking” may sound like an advertising cliché, but in this case two top loan officers at the bank who worked on the DEG deal have known the Flahertys for a long time. One of them has only been at Kitsap Bank for a short time, but before Jeff Reynolds came on board last August as Senior Vice President/Commercial Market Manager, his 30-plus years in business lending with Bank of America included numerous attempts to land the Flahertys’ company as a prime commercial account.

“One thing that’s always impressed me about Rick is his commitment to his product. He puts everything into a project,” Reynolds said. “There’s no halfway with Rick; he’s all in.”

Senior vice president and credit administrator Linda Smith also has known the Flahertys a long time, dating back to when she worked at InterWest Bank before joining Kitsap’s management team more than a dozen years ago.

“We’ve had a great relationship with Linda since we came to town,” Rick Flaherty said. “She did our first loan.”

Reynolds said knowing the owners have a solid track record in business and have been part of the community for a long time “makes a huge difference.”

“There’s a big value in Kitsap Bank being a community bank… we’ve worked and lived with Rick and his company for years,” he said. Knowing that history of a local business “broadens the non-tangible type of criteria when making a loan decision,” he added.

Although DEG had been turned down by numerous bigger banks who could have provided a larger start-up loan of $1.5 million that Flaherty was seeking, Reynolds said Kitsap Bank didn’t work on this deal because it presented an opportunity to look like the good guys coming to the aid of a local business no other lender would help.

“I think it was more that this is a very committed couple of entrepreneurs … working on a cool new environmental type of product,” he said.

That was echoed by Tony George, who took over as Kitsap Bank’s president and chief operating officer last year after Jim Carmichael retired. He has spearheaded the bank’s initiative on sustainable business practices, such as an emphasis on recycling and getting more customers to opt for paperless statements.

“I looked at that deal and I didn’t really know (Rick’s) background,” George said. “But I told Jeff, ‘We’ve got to do this.’”

He recalled reading the DEG loan application and thinking “this is going to be huge,” and that it was the kind of opportunity that Kitsap Bank is seeking “to partner with sustainable businesses.”

“There’s not a lot of banks looking at that,” he added. “There are sustainable businesses breaking into the clean-tech world, and they have unbelievable business models.”

He said Kitsap Bank isn’t changing its focus as a stable community bank that’s been around for more than a century.

“We’ve always been a very conservative bank. We have stringent credit standards and we pride ourselves on that,” he said. But it makes sense for the bank to support sustainable businesses within that approach, he added.

“The bank has a role,” George said, “but we’re not venture capitalists.”

With an SBA loan, the federal government guarantees about 75 percent or more of the loan’s value, which limits a bank’s risk when financing a new business venture.

“I think that’s what SBA loans are designed for, is companies in Rick’s stage of development,” Reynolds said.

Although economic development strategy often focuses on bringing established companies in aerospace or other major industries to Kitsap County, Flaherty said there are other emerging companies within the county that have the potential to reach a global market like DEG hopes to.

“There are some fantastic sutainable companies here,” he said.

George said Kitsap Bank is in a good position to help them grow.

“We have incredible lending capacity,” he said. “I don’t want to give the impression we’re going to do a lot of start-ups. We still have to adhere to our credit standards. But I think for a portion of our portfolio, we should be seeking out those types of deals.

“It’s a new understanding of where the world is going, where the economy is going, and where business is going.”

Editor’s note: This story has been corrected from the print version to note that Linda Smith formerly worked at InterWest Bank, not Columbia Bank.

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