Brian Duffy, president of San Diego, CA-based Financial Capital, recently spoke with senior editor Sherry Baranek about the many options out there for moldmakers to finance equipment purchases and gain working capital, concentrating on the benefits of working with a commercial lender. Brian has been servicing the needs of small businesses for more than 20 years and takes a consulting approach - trying to be sensitive to the specific requests of the customer and recommend the best solution based on each customer's situation.
1. Define a commercial lender.
The term commercial lender basically describes a lender who is granting loans to businesses versus consumer loans. It's a finance company that is not authorized to accept deposits, which means they are a non-bank and are usually licensed by their own state. The lending requirements are not affiliated with any of the state or federal banking regulations.
2. How does/will a commercial lender service a moldmaker differently than other organizations?
First of all, any meetings will typically occur at a customer's place of work. With a bank or other organization, frequently the borrower will have to travel to the bank's office to conduct business. A commercial lender will go directly to the customer's site to learn about the business and follow up by phone, mail, fax, overnight mail and the Internet to continue to learn about the business.
3. How are moldmakers buying their equipment now?
There are several ways moldmakers are making equipment purchases: they are using cash; using trade-ins of their existing equipment to partially pay for their new equipment; obtaining loans from banks or other commercial lenders; and getting short-term credit from the vendor from 90 up to 120 days payment to pay off the balance of the funds owed to the vendor. Sometimes they use a captive finance company that is partnered with the vendor. In other words, the vendor provides its own financing. The final area of sources of funds would be personal monies.
4. What is wrong with these methods?
In general, I would say all of these methods work, but if I was to pick them apart, I have found that some of these methods aren't as efficient as others. For example, a moldmaker may find that when he goes to his bank to borrow, the bank requires a large down payment. Many times banks are not as astute in lending for specific types of equipment as they are for providing short-term working capital loans, so in those instances when a bank requires a large down payment it's quite a drain on the valued working capital of the business. Therefore, if he went to another lender that could finance 100 percent of the invoice costs for the vendor, it would preserve the valuable working capital.
Also, sometimes when you are borrowing from a bank the rate charged is usually on a variable rate. You want to lock your rate into a fixed rate - especially in today's times with the ever-increasing cost of monies due to the federal reserve trying to keep inflation down.
Third, using a credit line that has been established with your bank to purchase a piece of equipment is very convenient for some small businesses, but does have drawbacks. Let's say a small business owner has a $200,000 credit line and there's a piece of equipment he wants to buy for $75,000. He knows he's got the credit line availability - but unfortunately that's not the way it's supposed to be done. The rule of thumb is that when you have a current asset, such as an accounts receivable or inventory, and you want to borrow against those, you are supposed to match your short-term borrowing with the current asset. A working capital line is designed to finance your short-term working capital requirements and is secured by your current assets. So, by using your credit line you are exhausting your short-term borrowing capability to finance a long-term asset.
If you're also borrowing from some other source it's important that you take into consideration what the best deal is - don't go to the first source out of convenience. It's good to compare one transaction to another and it's important that you use a level playing field in so doing. For example, if you are going to get a quote from the bank on a loan basis then you should get another quote from a commercial lender on the same basis.
5. What are the benefits to a moldmaker of using a commercial lender?
The benefits are numerous. First, there are potentially better deals rate-wise and it's also more efficient and convenient, especially when using commercial lenders that are specialized in the equipment lending business. There are additional sources of capital through the commercial lenders, which free up the bank line for short-term borrowing. An equipment lending specialist can sometimes get capital loans when the finances of the borrower don't warrant it - due to it having specific programs on an application-only basis. For example, let's say a company has a very good credit rating - it has paid its suppliers and existing creditors on time for other loans and equipment leases. But, every company goes through cyclical periods, it has ups and downs. Perhaps at the end of last year the company showed a loss. The company may then find it difficult to borrow through its bank or commercial lender, which requires full financial disclosure. Some of the commercial loan programs are such that you can, based on the good credit rating that you established over time, borrow up to $100,000 to $150,000 without disclosing your financial statements.
6. Why do you want to focus on moldmakers? What is it about this industry?
I've found that moldmakers need machine operators that are a cut above the rest in skill level. In a tool-and-die shop one may find the skill level of the machine operators is not nearly as high as in the moldmaking business. This industry really requires a highly skilled machine operator and that makes the industry a profitable business. Not just anyone can become a moldmaker, and I've found that the collateral is excellent, the moldmakers are buying, and that's why I particularly like to work with moldmakers. They're good entrepreneurial-type people, they seem to understand business and run their businesses well. They are effective in weeding out employees that aren't contributing to the business.
7. What are other options moldmakers can explore to buy the equipment they need?
Other than the sources of capital previously mentioned there are supplier partnerships, where the supplier contributes to the cost of the equipment. A moldmaker may then be able to buy a piece of equipment he/she wouldn't normally be able to afford.
SBA (Small Business Administration) loans - available on both a variable- and fixed-rate basis - are an excellent avenue for the small business. These loans do require more paperwork, but are loans federally guaranteed up to 90 percent of the amount of the funds loaned by the lender. It's geared well toward companies that are starting out and are fairly new, say from zero to three years in age. It also works well because SBA loans allow you to borrow for things other than equipment - you can borrow for things like working capital and purchasing a building. They frequently require that the transaction be partially or wholly secured by real estate owned by the borrower, which typically means a home in the case of a newer small business owner.
So it's important that you plan your SBA loan out well, because you're only going to be able to secure the piece of real estate one time. If you need working capital, for example, you should include that in your SBA loan request, because you can get money not only for the acquisition of equipment, but also for working capital. You should get it all done at once. SBA loans are popular for building purchases and the owner must be careful to ask about the SBA 504 loan benefits, as they are more competitive in rate than the SBA 7A program.
8. Can you provide step-by-step instructions on how to set oneself up with a commercial lender?
This is how I conduct business. I will contact the borrower and ask them what their dollar requirements are. Next, I learn about their businesses - size, age, the ownership of the company - to determine what the best program is to recommend as the solution to the customer's needs. I take the steps necessary to gather the data by either a visit - or if the customer is too far away from my office - by mail and fax. Once the credit information is complete, the borrower typically gets the decision in a period of less than 24 hours to about a week - depending on the type and the amount of the request. I prepare the loan documents and present them to the borrower for their signature. I also handle the vendor invoices, insurance coverage and such details before funding. The borrower provides his business history and financial reports, then selects the vendor and equipment details. Finally, the lender should assume the role of a consultant for that borrower and make sure that the best interests of the borrower are taken into consideration - there's a multitude of programs out there and the lender should make sure that the best fit is provided to the borrower.