If you already know where technology and automation can improve your business process, the next step is acquiring new technology in today’s lousy financial market.
If you’re thinking the recent stupid (and possibly fraudulent) lending practices only tighten the home credit markets, guess again. The suspect home loans were rolled into investment packages and sold through financial markets that hid what was inside. The technical term for this practice is “putting lipstick on a pig,” although “call the Attorney General” also springs to mind.
That said, business must go on, and you need some new technology. I talked to Tim Nicholson of Dolphin Capital (now a part of Leaf Financial), and corresponded with Manual Gonzalez, Senior Vice President and Business Manager for Business Direct Long Term Lending Group at Wells Fargo. Nicholson works with a reseller I know, which is how I met him. Wells Fargo claims to be the country’s number one small business lender. Its sponsorship of the Webcast I did earlier this year allowed me to see first hand that it is serious about the small business market. First I asked what lending organizations look for in credit applicants. Not surprisingly, both groups wanted customers with good credit history. If you don’t have much credit history, good or bad, start talking to your banker before you need help. Gonzalez said, “If the business owner is a customer who has established a solid working relationship with us, our bankers will take this into consideration, along with the other Cs during the decision making process.”
The “other Cs” are the bank’s “Five Cs of Credit” questions. These are:
– Character: Personal credit history, credit report scores, and how previous credit was repaid.
– Conditions: How will the money be used? Does the plan make business sense?
– Capital: How much skin does the business owner have in the game? There is no magic formula, but those with buckets of their own money in the business tend to work harder.
– Capacity: This really means Cash Flow, as in will the current or projected cash flow support the business and loan repayment.
– Collateral: Small loans don’t get into this too much, but as your credit needs become more sophisticated, so do the types of guarantees needed to secure funding. Equipment, buildings, accounts receivable, and even inventory may be involved in order to close the financing deal.
Wells Fargo offers a program called Equipment Express for small businesses needing a loan up to US$100,000. It’s a bit of a mashup between a typical fixed rate loan and a credit line. The repayment time can range from two to six years and when you make the last payment the equipment belongs to you.
What if you don’t really want to own the equipment at the end of the period? That brings up leasing, so let’s talk to Tim Nicholson for a bit.
“Rule of thumb: invest in things that appreciate in value, lease things that depreciate in value,” said Nicholson.
When you lease, you don’t tie up your own operating capital or chew up your line of credit at the bank, and you keep your cash available for other business needs.
Politely, Nicholson said “technology hardware and software is a moving target with no attraction for long-term ownership. Utilization and effectiveness only lasts a few years.” Ah, Nicholson certainly nailed much of the technology industry there, didn’t he?
Leasing allows you to pay for the beneficial part of the product you buy, and end the lease before the product is worn out. But getting the benefit immediately from new technology, while paying for it over the next few years, beats paying a large wad of cash upfront and hope the benefits cover the investment made, says Nicholson.
The credit problems haven’t hit Nicholson or Dolphin Capital. “If we’re financing water filtration systems for a dealer, the business model is highly diversified.” Selling to everything from auto dealers to dentists ensures that a slow down in any one market won’t depress the whole business. Dolphin Capital has little exposure to the real estate credit mess, and its funding sources have not cut back.
When applying for a lease, expect the lease broker to contact customers and users on your references list. Just like with the bank, the better credit you have the better your chances of getting a lease approved and getting favorable terms.
Vendors often have a leasing partner who knows the business, like how Nicholson and Dolphin Capital work with FileEngine or the water filtration system mentioned. The dealers and customers don’t have to educate a banker on new products, since the leasing company knows the product and market well. But if you have an existing line of credit that covers the new technology you need, you don’t have to educate the banker, you just tap your line of credit.
Times aren’t great for those in real estate and some financial services companies, but that won’t stop you from getting the technology you need for your business. According to investment expert John Mauldin, we’ll have a light recession, then “we are going to see a low-growth Muddle Through Economy for 2008 and into 2009.”
FYI — the best explanations about the current sub-prime mess I’ve seen comes from Mauldin’s Front Line Thoughts newsletter, which you can get for free. Recommended reading, even if you don’t have millions to invest. But at least you can now get funding for the technology you need to keep going, muddle through, or maybe grow a bit.