Commentary & Analysis
Giving Credit Where It’s Due: Lenders Say the Climate for Borrowing at Graph Expo Will Be Invigorating (Part 2)
Commercial lenders coming to Graph Expo next week are bringing their money with them,
By Patrick Henry
Published: October 24, 2008
Commercial lenders coming to Graph Expo next week are bringing their money with them, and they say that they’re ready to talk terms with printers who can make a good case for borrowing it. A printer with a financially sound business plan who believes that a new press is a sensible investment shouldn’t have trouble convincing a financier to furnish the cash needed to buy it—provided that the borrower follows the advice that the lenders are traveling to Graph Expo to dispense.
In some ways, says Michael (Mickey) Urquhart, senior vice president of sales for the graphic arts financial division of People’s Capital & Leasing Corp. (booth 1369), printers are better positioned for borrowing than business owners in other industrial sectors. The durable machinery that printers buy has “good retained value” that gives it a longer useful life than high-tech equipment—a fact not lost, he says, on lenders who base the loan decision partly on the projected value of what the borrower wants to purchase.
Urquhart thinks that another business trait in printers’ favor is the fact that their industry is less volatile than others: for example, transportation, where almost everything hinges on movement in fuel prices; or construction, subject to real-estate market slumps like the one bedeviling the broad economy now.
Not surprisingly, third-party finance companies that specialize in lending to the printing industry have a well informed sense not only of what printers buy, but why they buy it.
Jeff Shaner, executive vice president of Great Atlantic Capital Corp. (booth 3736), says that trends in borrowing reflect printers’ desire for equipment that will let them manufacture more product with less manpower, time, and cost. These investments, says Robert G. Seeds, Jr., president of International Financial Services Corp. (booth 4225), cover “all types of hard assets” in prepress, press, and postpress, conventional and digital alike.
All this and sheeters, too
According to Urquhart, printers are financing “everything from prepress equipment to finishing equipment, digital to offset presses, and variable to web presses.” He adds that sheeters have become a popular item to finance as printers discover the economy of cutting their own sheets from roll stock.
Tough times tend to put more used equipment into the market, notes Steven Cubellis, senior vice president at RCA Capital Corp. (booth 3641). “Whether through plant liquidations or printers just selling their older presses that are not used as often, more and more equipment is available and at good prices,” he says. It’s a double benefit for buyers because the influx of used equipment “drives the sellers of new equipment to be more aggressive with their prices, too.”
Although lenders at Graph Expo and in the general financial marketplace are receptive to equipment loan applications from printers, getting the loan officer to stamp “APPROVED” won’t be just a matter of demanding, “Show me the money.”
To convince lenders that they are worthwhile risks, printers must make a case for borrowing that is as well structured and carefully documented as any other aspect of a business plan.
Teach your bankers well
Paul Reilly, a partner in Compass Capital Partners Ltd., has a threefold piece of advice for printers dealing directly with banks: “Educate your banker that the printing industry has contracted during recent downturns and is usually one of the first industries to rebound. Demonstrate willingness to adjust cost structure in response to lower sales. Educate your banker that the assets of a printing company are strong: ‘blue chip’ receivables and printing equipment with superb resale value.”
Urquhart believes that most printers wouldn’t approach lenders if they weren’t reasonably certain that they were good candidates for a loan. He says that in all cases, lenders will want to know: does the printer have the ability to service the debt? Does the borrower have a strong enough balance sheet and sufficient liquidity to support the loan? The due diligence might take longer in today’s more cautious atmosphere. But if the individual borrower’s answers are satisfactory, Urquhart says, macroeconomics won’t matter: “we’re going to lend.”
Printers should first do a thorough ROI analysis and “justify internally, to themselves” the need and the opportunity that the loan represents. The applicant should be ready to state this justification to the lender so that the lender doesn’t have to ask for it, Urquhart says.
He also urges printers to “take pride in the quality of their financial statements” by submitting them to the review of an independent accountant before presenting them to the lender. “When I see this kind of review being done, I’m impressed by both the quality and the quantity of the information,” Urquhart says.
What to ask the accountant for
Printers planning to shop for loans at Graph Expo next week can help themselves by bringing along the paperwork that the lenders will want to see. To be sure of obtaining the most accurate and competitive quote, says Seeds, the applicant should provide three years of balance sheets and income statements. His company judges the financials according to 11 different criteria, eight forward-looking and three historical.
“An attendee looking to finance a piece of equipment should come prepared with a sales agreement or at least a detailed list of the equipment that they are looking to buy as well as at least their most current year-end financial statement and current interim financial statement,” says Cubellis. With the help of these documents, he adds, “we can provide a quote and in many cases an approval right on the show floor.”
Apart from the numbers, what lenders really want to know is how much strategic thinking has gone into the investment for which the loan is being sought. Borrowers, says Shaner, should be prepared to state what they want to buy, why they want to buy it, and what that new equipment will do for them. More specifically, says Urquhart, the key considerations are:
• What additional business benefits will the purchase bring?
• What labor savings will occur as a result of the purchase?
Seeds suggests that trade printers may face tougher scrutiny than commercial printers owing to the nature of what they do. “It is important that the borrower is the primary contractor, especially in a pre-recession or recession period,” he explains. “The reason is that if a company is doing a great deal of overflow work for another contractor and things tighten up, the overflow work is the first to go.”
Dealing with digital depreciation
Another caution applies to borrowing for digital equipment, which Seeds recommends against financing for longer than five years. “Digital equipment upgrades have made huge strides, and if a borrower finances for, say, seven years and the equipment is no longer highly efficient after five years, it will create a challenge for the borrower,” he says.
Nevertheless, the lenders recognize the necessity of investing in new technologies as a hedge against the kind of business conditions that printers are facing now. “The efficiencies of today's equipment reduce manpower and enable companies to operate in a more efficient way in good times, and even more so in difficult times,” says Seeds, who also urges printers to factor labor rates into their purchasing plans. “They are not going down, so it is important to find more efficient equipment to balance that fact.”
Would-be borrowers can cover all of these bases conveniently in McCormick place next week. “Many manufacturers have a finance arm within their booths at Graph Expo,” notes Urquhart, who recommends that attendees shop around for options before making a commitment. Given the variety of lending sources among show exhibitors, he says, “it is easy to shop for financing under the Graph Expo roof.”
Funds to be found
Cubellis also thinks Graph Expo can be a money mall for qualified applicants. “I would tell a prospective buyer to do his homework and shop around for the best deal,” he advises. “When presenting the credit package to the finance company, be ready to justify the purchase from a cash flow standpoint, and be aware that there still is money available. RCA and companies like us are still aggressive and want to help in any way we can.”
If lenders can be helpfully aggressive, then borrowers can be judiciously adventurous. At Graph Expo, the nothing-to-fear-but-fear-itself principle is still good counsel to follow.
John Hyde, vice president and senior consultant of the National Association for Printing Leadership (NAPL) (booth Grand 1), admits that some of his clients were “frozen like deer in the headlights” amidst the shock and awe emanating from the near-meltdown of the credit system. But others, he says, “are driving hard to expand while others are contracting. They’re not going to the sidelines just because the morning headlines are bad.”
(Editor’s note: this article includes reporting by Christopher Price, vice president of the Graphic Arts Show Company, the producer of Graph Expo 2008)