Lender Financing: It’s a Balancing Act
One common phrase that has been repeated by chief executives, particularly financial officers, during the Great Recession of 2008-2010 sounds a little something like, "We were about to pull the trigger on that press purchase until the economy went sour. Boy, am I glad I held off."
This, of course, has been bad news for manufacturers of such big-ticket items. But, what about the financial institutions that help make these acquisitions a reality? Are they glad that you, the printer, are not in over your head on a piece of machinery with too much capacity and not enough ROI? That goes without saying.
In truth, companies that fail to "pull the trigger" have weeded themselves out due to the realization that they cannot justify a major capex, independent of the state of the economy. And, as big as the industry may seem, it is also a tight-knit fraternity whose members swap ideas. Much anecdotal information would seem to point to banks and industry lenders making it much more difficult to obtain financing or a line of credit. Is it the case? Is it tougher to nail down financing now than it was prior to the recession?
"Not necessarily," cautions Anne Quirk, vice president of Buffalo, NY-based M&T Bank, and an individual who has dealt with a lot of printers over the years. "All lending depends on the financial condition of the borrower. If the borrower is struggling with its current debt, then there are major concerns about its ability to handle new debt. This is true at all points in time, and not just when the economy is weak."
Quirk feels that too many businesses—and she isn't singling out the printing industry—view equipment purchases as a cure-all for the bottom line. A careful analysis will yield the justifiable motivations behind obtaining new gear: reduced labor costs, and an improvement in productivity and efficiency, she says.
"Projections can be a key piece of information for a company to present to a lender," Quirk says. "The lender wants to know the economic benefits in making the loan and how it will be repaid."
Decline in Valuations
One of the most notable differences from the pre-recession to today's landscape is the decreasing equipment value, points out Thomas Davies, vice president of People's Capital in Bridgeport, CT. He notes that most finance companies are no longer doing eight-year terms without money down.
"A printer's cash flow is still considered the primary benchmark when underwriting a new request," Davies stresses. "We wouldn't expect to see the company's revenues back to where they were in 2007 or 2008; however, we would like to see that the business adjusted its costs and is generating enough cash from its operations to support its obligations.
"Also, we look at the company's liquidity (cash, credit line availability) to see if it has the ability to support any short-term cash flow problems, and its leverage (debt to tangible net worth) to understand its ability to survive should the economy and industry continue to remain weak."
Quirk feels the two most prominent benchmarks lenders use are the Debt Service Coverage Ratio (DSCR) and Senior Debt/EBITDA, which paint an accurate picture of a printer's ability to take on added debt. DSCR should be greater than 1.0x, she says, with the new debt calculated into the ratio.
"Each financial institution will set its covenants based on a number of factors as they analyze the company," Quirk adds. "Naturally, the Senior Debt/EBITDA should not be very high."
How can printers best position themselves for success when approaching a lending institution? Again, Quirk underscores the importance of being able to convey the financial impact of the loan request, which holds true when trying to obtain monies to purchase equipment, increase a line of credit or secure a term loan.
It has been Quirk's experience that unrealistic expectations can also lead to rejection. She recommends patience, both on paper with projections and in person being interviewed by the lender.
Power of Projections
"For example, if you are planning to terminate personnel, have you built into your projections the time it will take to truly roll-off out of the company—i.e., benefits, vacation time earned, etc.?" she notes. "If you are moving or need to rearrange your shop to bring in another company, a piece of equipment or downsize the operations, have you built in the downtime on the existing operation? I have seen the mistakes and omissions from companies who throw projections together too quickly, cry that it is impossible to project what is going to happen for the year, or state that projections are meaningless."
Companies that work from projections, and that compare their monthly performance to those projections, usually are much more successful than those who don't, according to Quirk.
"Management needs to spend time on the financials...what they are saying and the impact on the company in order to successfully manage through tough times. The more on top of it they are, the better they can weather tough times."
Cash flow lending has received some negative press, but Quirk says that it is the "weakened cash flow positions of the borrowers that has put a damper on lending." She says a riskier lender (which excludes most, if not all, banks) may not seek as much on the collateral side, but it will result in higher rates and fees, and/or additional guarantees. As the balance sheet and income statement go, so go the risk and the rates.
Simply put, if a company has been overspending the past few years, such as taking large salaries or distributions out of the company, they don't have the wherewithal to weather the tough times, she contends. "Banks set covenants to help a borrower keep its balance sheet and income statement in line. It is not to restrict a company, but to help it keep a proper balance."
While People's Capital doesn't provide lines of credit, Davies has witnessed the downfall of many borrowers due to tightening or elimination of the lines. "Unfortunately, at a time when the printer's receivables are likely being stretched, the lender is protecting itself by limiting what it considers eligible accounts," he says. "Companies have also been faced with liquidity limitations as suppliers are cutting back on traditional payment terms."
Suffice to say, 2010 offers a lending environment that seeks proper balance...not to mention proper perspective. PI