Electronic Tool Frees Up Some Time and Money for Smaller Businesses
Electronic financial tools can save you money. Here’s one example.
Kim Bright tapped the resources of the digital age to save her company, Adlink Cable Advertising of West Los Angeles, $250,000 in interest costs in two years.
In Adlink’s case, the key was a sophisticated cash-management account offered by Merrill Lynch--one of many electronic financial tools long familiar to big businesses and, as described in this space last week, now available to small- to mid-size businesses to streamline operations, cut costs and speed cash flow.
As Adlink’s senior vice president and chief financial officer, Bright manages the finances of her company, which distributes national and regional advertising electronically to 80 cable television systems reaching 3.3 million households in five counties in and around Los Angeles.
The company employs 130 people and expects to see revenues of $140 million this year, according to its president and chief executive, Charles W. Thurston.
Five years ago Bright signed a “draw-down” lease with Digital Financial Services, at the time a unit of GE Capital and now owned by Compaq, to upgrade Adlink’s distribution system with $10 million in new digital equipment.
As the name implies, a draw-down lease is like a bank line of credit in the sense that you tap it as you take delivery on leased equipment over time--and make lease payments, including interest, only as you actually put the equipment into use. The strategy allows you to save on interest costs just as you do with a line of credit, which rings up interest charges only on the money you actually use.
The interest rate on Adlink’s lease began at about 7%, according to Bright, and was to increase to about 9.9% in 1998--a substantial increase that prompted her to shop for an alternative.
Her solution was a two-piece, $8-million loan package from Merrill Lynch consisting of a $2-million line of credit for working capital, renewable annually, plus $6 million to get Adlink out from under the original lease on Adlink’s equipment and buy additional equipment.
Merrill Lynch called the $6-million part of the package a reducing revolver loan, but it really worked like a line of credit earning interest at a rate reflecting the interest on commercial paper plus 260 basis points--at the time about 8.1% in all. A basis point is one one-hundredth of a percent.
That looked better than the 9.9% Adlink was to pay on the lease beginning in 1998, and Merrill Lynch sweetened the package by tying it to a “working-capital management account.” Such an account is like an automated business checking account in which idle funds went to pay down existing debt until actually needed to pay checks coming through the account.
The financial impact of the arrangement was substantial, according to Bright. Automatically, whatever money she put into the account to cover, say, checks written to vendors, went first to pay down the debt, cutting interest costs for as long as the checks remained outstanding--often five to 10 business days.
“With $4 million in debt,” she said, “if I wrote checks for $5 million that didn’t get cashed for 10 business days, we saved interest on the full $5 million for that period.
“It saved us $250,000,” she added. “That’s a significant savings on $4 million in debt, and since we’re a seasonal business, it’s very important to our bottom line.”
Like the “sweep” accounts offered by banks and other financial institutions, Merrill Lynch’s working-capital management account also pays money-market interest on funds not applied against debt. As Bright herself discovered when she researched such accounts, however, terms and conditions vary widely, and not all sweep accounts work automatically; some, indeed, require that you move funds from a checking into a money-market account and vice versa via telephone or computer connection.
“This one is self-managing--no phone calls, no online time,” said Bright. “It frees up my time.”
*
Recent Financing and Insurance columns are available at https://www.latimes.com/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
