The print industry has experienced difficulty in attracting lender activity in recent months, but that doesn’t mean that financing opportunities aren’t out there. Industry knowledgeable lenders still offer a variety of viable loan products. One excellent resource is People’s Capital and Leasing Corporation (“People’s”), a wholly owned subsidiary of People’s Bank. People’s experts like Mickey Urquhart, senior vice president, continue to work closely with the key vendors of sheetfed presses and finishing equipment, and offer a full gamut of loan and leasing products:
Personal Guarantees & Asset Depreciation in a Changing Market
Whether a personal guarantee is necessary depends largely on two factors:
• The loan product selected. Personal guarantees are required by law for the SBA portion of the loan (40 percent). For the 50 percent advance from the senior lender—i.e.: an entity like People’s Capital—the call is discretionary. On bonds, personal guarantees are also discretionary.
• The business history. If a company is tightly held, has two or three owners, has been in business for less than five years, and has demonstrated the ability to provide personal guarantees to its primary lender, then an equipment lender is going to want the same personal guarantee. Exceptions can be made when the borrower has been in operation six or more years, has demonstrated the ability to retain some profits in the company, and can show balance sheet liquidity in tough times to support the balance going forward.
Discretionary personal guarantees may also be waived if the borrower has a hard asset to offer or puts more cash into the deal in lieu of a personal guarantee. People’s uses orderly liquidated values on pre- and post-production equipment as its basis for lending. Historically, it went as high as 80 percent on day one in 2008 and prior. Today, its range is 65-70 percent, with much lower day one values, shorter terms, and more money in the deal.
Lenders have also changed their depreciation calculations on loans. People’s formerly depreciated an asset by 10 percent per year, so a starting value of 80 percent on day one would be 72 percent at the end of the first year. Their starting value today is 70 percent, with a 12-15 percent depreciation per year. Clearly, there has been a major shift in a lender’s valuation of printing equipment in response to economic changes.
Help the Lender Help You
Today’s lenders consider not only the borrower’s collateral position, but also the quality of the borrower’s presentation. For a successful loan application, we recommend:
• Investing in an accountant-reviewed financial statement. This gives lenders more confidence than a handwritten tax return or a verbal claim that the desired equipment will improve your profits by “X percent”.
• Providing financial projections that support the purpose of the investment and justify the loan. Lenders don’t just want to know your collateral position. They want to see what this equipment will do for your bottom line, and how you have demonstrated that it is going to support you financially.
Printers with multiple loans and long term debt who are not in a position to purchase or finance new equipment may find it advantageous to refinance all of their loans into one facility. Refinancing can reduce the cash flow requirement to service long term debt while providing additional cash to run the business.
While there will likely be prepayment penalties, the current low rates make this a good avenue to explore. For example, People’s is currently lending on a five-year term at an average of 4.5 percent. If an existing loan is at 6.0-6.5 percent with a one to two percent prepayment penalty, the inherent penalty is only 50-70 basis points in the form of a rate.
From an equity or collateral standpoint, lenders are actually better off lending against an existing loan. Eventually, the loan reaches a tipping or equity positive point. When financing a new piece of equipment, the lender probably still has a negative equity position, based on the percentages noted above. By comparison, in term loans that are two to four years old, that equity has become positive, making it a better deal for the lender to refinance these loans, provided that they can offer an attractive term and rate.
All in all, refinancing is something that every printer should look at for its potentially positive impact on the balance sheet. And regardless of whether a borrower is financing or refinancing, cleaning up the balance sheet and moving current debt into the long term will make for more favorable operating ratios.
Part 2 of this article will address asset-based lending options that provide workable lines of credit secured by receivables and inventory.
Stu’s View is contributed by Stuart Margolis, CPA and Partner of MargolisBecker LLC to provide information that helps firms operate profitably. More information can be found at www.margolisbecker.com.