The Curse of Doing Well in Today's Economy

This is a story about two companies that I work with. Both are woman owned and both are in industries that are being affected positively by federal stimulus funds. By most definitions, both are small. Both have been in business for more than 10 years. Both have principals with high personal credit scores and both companies are profitable for 2009. These two well-run companies are poised to pull through the recession and even to succeed, but one critical pitfall in the stimulus plan is getting in their way.

The first company is a distributor of small buses used by public, private, and charter transportation enterprises. Until a year ago, the business had a sizeable financing line of credit with Textron Financial. Under this arrangement, Textron financed the vehicles from the time they arrived on the distributor’s lot until the time the customer paid for them. But in October 2008, Textron announced it was no longer going to be in the asset-based lending business. The distributor no longer had financing to carry the inventory costs. Neither the distributor nor I have been able to find a single financing source that is currently doing vehicle financing. The business has a strong banking relationship with a local community bank and that bank stepped in and helped by raising the business’s regular line of credit. Still, the company doesn’t have enough working capital.

The first major funding being pushed out of the president’s stimulus plan, which was passed in January 2009, is going to cities and states for transportation-related projects. The good news is that cities and other governmental entities are suddenly able to buy vehicles from this distributor. As of November of 2009, this distributor is sitting on a backlog of $25 million in new orders to be delivered over the next two years. Its average annual revenues over the last three years is $10 million. This distributor is tremendously excited about the sales and profit potential. There is only one catch: The distributor doesn’t have enough working capital to handle the new sales. Payroll will increase, overhead will increase, and most of all, accounts receivable will increase.

The SBA has a pilot vehicle floor-plan program that was recently introduced so I scoured the country looking for an SBA lender that would provide floor-plan financing. To date, across the country, I have only found one bank that has made one loan under this floor-plan program. I haven’t found any banks west of the Mississippi that are using this SBA floor-plan line.

My client, the bus distributor, has one other problem that is hampering sales efforts. A fair number of buses are sold to private companies. This year, leasing companies and banks have been reluctant to finance many of these companies. And equipment leasing has dramatically dropped nationwide. My client can’t sell their buses, which cost $80,000 to $150,000, to companies that can’t find financing.

Equity financing may be an option for this company and the owners have talked to several potential investors. But, of course, the downside is they will have to give up a share of ownership. 

The second company sells a new, highly efficient indoor/outdoor lighting product. This product can replace existing street lamps and warehouse/gymnasium lighting and save the customer as much as 75 percent on energy costs. The lights can be combined with solar panels to save even more money.

City, state, and federal government agencies are starting to buy this client’s lighting products, but so far there hasn't been huge demand in the private sector, even though there are federal tax credits for businesses that retrofit their buildings with energy-efficient technology. These businesses are hesitant about spending their cash.

So far, this business has been able to find working capital to handle the increase in sales revenues, but getting manufacturing equipment to ramp up production has been a struggle. Equipment leasing has been difficult to arrange and bank financing has been nonexistent to date.

With both companies, there is another common thread. A few years ago, banks, equipment leasing companies, and other lenders would loan to these companies based on their order backlog and their potential. Not any longer. Nearly every finance source I know will only look backward at historical financials. So far, they are highly reluctant to use revenue projections for a new product line or an anticipated spike in sales.

These two companies combined could add 25 to 40 more employees to their payroll if they had adequate financing.

Ivory tower economists rarely anticipate such micro-effects of the government’s stimulus policies when putting them into place. If our economy is to truly recover, it would be wise for the policy makers to listen to these business owners.

Sam Thacker is a partner in Austin Texas based Business Finance Solutions.

You may contact Sam directly at: sam@lesliethacker.com

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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.