Equipment Financing -- Got Money?February 2009 By Erik Cagle
Cash flow lending certainly is sporting a black eye these days. In recent months, an untold number of printers have shuttered their doors because their banks have been unwilling to extend them a revolving line of credit. Term loans for equipment, on the other hand, may not be as unattainable as you think. And for those with excellent financials, a pleasant surprise awaits.
How difficult it is to get financing in the current climate is a matter of opinion, but several authorities on lending see a golden opportunity for those companies that have historically taken great care in managing their businesses.
“Standards are more stringent; the deals are looked at more carefully,” says Jeff Shaner, executive VP with Great Atlantic Capital. “Deals that might have gone through in 2007 or even last spring, might not get done today. If you rate credits at different levels—A, B, C—maybe we won’t do a C-minus deal now, only C-plus and higher.”
Requisites Still the Same
The burden of proof probably isn’t all that much different now than it was 12 months ago. Requisites include three years worth of financial statements, numbers that indicate profitability, and an ability to fund past and future debt, Shaner notes. The more recent the statements, the better. Obvious red flags are a bad payment history and past bankruptcies, while outdated financials can bog down the process.
Lenders also like the fact that capital equipment retains its residual value. “If you have a strong piece of iron that holds its value well, you might bend your rules a little bit,” he adds, emphasizing the importance of the opening pitch businesses make to lenders in the process of trying to secure a term loan.
For Mickey Urquhart, senior VP of sales for People’s Capital & Leasing, the pitch can make or break a printer’s ability to secure financing.
“I like to see the borrower’s passion for the investment,” he says. “If there’s an ambivalence toward it, that’s a whole different story. The passion to move forward with the technology and the investment is big. I’ve had printers tell me, ‘If I don’t do it, I’ll go out of business.’ I’d rather hear that they’re making the purchase for efficiencies, growth and technological advances.”
When Urquhart meets with prospective borrowers, he looks at the following criteria: collateral, ratio of loan to value over the term of the loan, and historic and prospective cash flow (net income, plus depreciation, plus interest). Other elements he uses to gauge eligibility are balance sheet analytics—the liquidity of the company—and leverage, aka total liabilities to net worth.
Surprisingly, some printers are greatly mistaken as to their ability, or inability, to acquire new equipment. Some may be better off buying a lesser, more affordable piece of machinery. But the lender’s office is a terrible place for discovering that fact. Due diligence on the part of the printer can prevent this, or at least safeguard against the possibility. Meanwhile, other printers gauge general economic conditions to reach the assumption that their shop cannot add new gear, when, in fact, a purchase can be justified.
Urquhart sometimes sees the fear of commitment. This syndrome manifests itself in various forms, such as the printer’s unwillingness to provide added collateral, refusing to give personal guarantees or the failure to provide accountant- prepared statements.
Good Deal or Bad?
These aforementioned lenders have shown a willingness to make a deal. But the question is, can a good deal with favorable terms be had under these circumstances? Stuart Margolis of MargolisBecker LLC, a business and management advisory firm for the graphic arts, sees a mixed blessing for likely borrowers.
“A while back, you would have been able to get 100 percent financing, but today that would be impossible,” he points out. “They’ll want you to make a down payment. From a terms standpoint, the only good one is interest rates, which are still low. Time to repay is getting shorter, so you probably can’t get 10 years. Three or five is more the norm.”
The loan process has also reverted to the two- to three-month range for completion instead of 30 days, according to Margolis. And the methodical, paper-laden process historically associated with lending seems to be making a comeback.
One of the most stressing burdens of proof, he says, is proving the new gear will not only cover the debt, but also provide sufficient margin. Cash flow to debt needs to be 1.5 to 1.
It’s incumbent upon printers to sit down with lenders to explore options. Shaner sees a lot of affordable, cost-effective buys on the secondary market, and he sees more used press capacity finding its way to the market. “Overcapacity of used equipment is not as bad as 2002 but, come June, who knows? Good, used equipment is moving.”
Urquhart stresses that printers need to sit down with potential lenders. “Lending is a relationship. Ask your lender or bank to come visit you. Get free advice. What’s a 30-minute visit from a prospective lender to sit down, roll up his sleeves and give his honest opinion?” PI