Get Out Your Checkbook

Recovery is ongoing, and despite tightened credit markets, now is a good time to invest in capital equipment.

Nothing remains of 2009's economic tidal wave except the bad memories of what it was like during the Great Recession. Financial reports still don't paint sunny pictures of the current situation, but the economy is improving, albeit slowly (for more on the state of the package printing industry, go to p. 14). For companies that waited for economic conditions to improve before making a major capital equipment purchase, now is the time to start investigating, at the very least, in earnest.

"When you add together an improving economy with low financing rates, it sends a signal to business owners to evaluate strategic reinvestments in their companies," says Linda Reed, national program director, PNC Equipment Finance. "New equipment has the potential to increase production and efficiencies and, ultimately, can deliver to the bottom line."

That said, navigating today's credit waters is not what it was in the late 1990s and early 2000s. Back then getting credit was easy, but that's not the case today. Lenders have tightened up, and disclosure is the name of the game, as lenders ask borrowers to reveal more and more. To secure financing, printers must be prepared when they meet with their banks or financing companies.

It's a good time

Despite the tightening of the credit markets, now is a good time to consider a capital equipment purchase, although some warn that printers must be in the right position to buy. "Right now is an excellent time to be looking to upgrade your plant, as eventually the interest rates will go up," asserts Reed. "Many customers have decided it is no longer cost-effective to keep fixing older and less-efficient equipment. By purchasing new equipment with today's rates, they are actually saving on repair bills, labor, turnaround time, and product waste."

Jim Dugan, vice president, financial services, Heidelberg USA, Inc. and David Roper, president, Alliant Capital, agree that it is an opportune time to upgrade if the situation is right.

"It is a good time for those who are well positioned to buy," says Dugan. "Financing rates are exceptionally good and manufacturers' pricing is good as well. But, obviously you've got to have the need also."

Roper adds, "It all depends on their book of business. If companies are looking to buy equipment, it's important that they have the revenue to support it, especially if they are going to finance it."

Printers are, in fact, starting to look at capital equipment purchases, according to Dugan, and package printers are in a good spot. "Packaging is probably the best part of the industry right now in printing," he says. "Package printing is better than commercial printing at the moment." He adds that orders are up as well. "We're seeing more orders now. We're seeing more optimism. We're having more conversations with people who are planning to do the things to be ready for the new beginning."

Reed concurs, also citing orders and inquiries. "We have seen an increase in the number of customers looking to finance new equipment during the last several months," she says, "which includes large corporations as well as small family-held companies and mid-size companies."

Getting around

There's no road map between point A and point B when trying to finance a capital expenditure such as a printing press. What printers need to remember, is that the credit market is very different than it was as recently as five or six years ago. "Because the requirements for equity are higher, the requirements for better information are more substantial, the requirements for support from the principals are greater, so every aspect of what a lender used to do has tightened up," says Dugan. Preparation, therefore, is key.

"Right now customers have to prepare and understand what they do, how they do it, and determine if they are doing it efficiently," says Dugan, "So they really have to look at what they're doing now and ask if they are doing it in the most efficient manner with the most productive equipment."

If the answer to that question is no and the printer needs to buy equipment, the customer needs to convey how changing the way they do business will not only cut cost, but also make them more efficient, which will produce add-backs in profitability that a customer can use as cash flow to pay for the equipment.

Roper agrees. "The important thing is just being prepared when they go in there," he says. Being prepared includes, according to Roper, having a full set of financial statements and supporting documentation for any outlying data points, such as a recent loss. The reason is that financing companies today are looking for new information. "Financial companies are looking for a little bit more there," says Roper. "Banks are looking, for the most part, for the current cash flow of the company to support the new equipment, versus allowing them to build a book of business around it."

Dugan adds, "Lenders want you to approach them with every bit of information you have that explains why they should lend you money. The more you can tell them about why they're going to have less risk, the better off you're going to be."

Consider the SBA

For small businesses, one avenue to investigate is going with a Small Business Administration (SBA) Loan. "This is a very good program for printers of all types to utilize," says Dugan. "There are some limitations, some restrictions, and the paperwork is a bit extensive, which turns off a lot of people, but lenders love to do SBA loans." Here's why:

The customer requirement for securing an SBA loan is for 10 percent in equity in the transaction. "That's not necessarily 10 percent down on a piece of a equipment," states Dugan. "That's 10 percent of the project cost." Then, the SBA essentially guarantees and provides moneys to the lender in the transaction. The lender only puts in 50 percent of the money, and the SBA puts up 40 percent. "What's appealing," adds Dugan," is that the lender, who only puts up 50 percent of the money, gets a lien on 100 percent of the asset." So, according to Dugan, from a collateral perspective, it's extremely safe for a lender to do.

The only drawback is the work that must be done up front by the printer. "It's time consuming and it's complex in terms of what they want," says Dugan. "For privately owned small businesses, personal guarantees are required, and personal financial information is required."

Think Boy Scout

According to Roper, customers have been much better prepared of late. "They're much more prepared than they were in the late 1990s or early 2000s," he says. "Credit was so easy, they didn't expect anybody to ask any tough questions. Now, when they come, they're a lot more prepared and a lot more willing to give the information that you need to make a good credit decision."

"Being prepared and doing your homework prior to approaching a lender is the best thing you can do for yourself," adds Dugan.

The bottom line is that if printers are well prepared and can justify the purchases they are looking to make, now is a good time to buy. "The economy is improving, rates are low," says Reed. "This is a great time to enhance your company's ability to increase production and efficiency, which usually translates into additional profits on the bottom line." pP

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