New Lenders Help Small Firms
The credit crunch facing small and mid-size businesses is spawning its own solution in unexpected ways, as Matt Willard, who runs Willard Engineering, a distributor of factory automation equipment in Santa Fe Springs, discovered when a man from United Parcel Service Inc. called on him one day last year.
Don Marchbanks, director of West Coast sales for UPS Capital Corp. in Irvine, a newly formed subsidiary of the big Atlanta-based package service, didn’t show up driving a brown truck and wearing a brown uniform, and he didn’t come to deliver a package. He came to tell Willard that UPS now lends money to small and mid-size businesses, and that if Willard needed working capital, UPS wanted to talk.
UPS isn’t the only new deep-pocket lender targeting small and mid-size companies these days.
Siemens Financial Services Inc., a unit of the European electronics manufacturer, just last month began selling accounts-receivable and inventory financing nationwide out of offices in Bridgewater, N.J., Chicago and Dallas.
In addition, a handful of aggressive private investor groups are lending to small and mid-size businesses, among them Hilco Capital, an affiliate of equipment appraisal firm Hilco Trading Co. The $150-million fund is seeking to leverage the appraisal expertise of its Chicago-based parent company in selling asset-based loans and leasing deals to mid-size manufacturers, distributors and service companies nationwide.
A new lender with deep pockets was just what Willard needed. His bank, Sanwa, had just refused to renew his $250,000 line of credit, leaving Willard caught in a credit crunch just then beginning to hit business borrowers in California--a trend now fully developed and crimping the operations of countless numbers of mid-size companies across the country.
But if banks grew wary of lending to small and mid-size businesses, the businesses didn’t stop needing debt financing. Indeed, as the supply dropped, demand went up, prompting new lenders such as UPS Capital and the others to step in.
These lenders charge higher interest rates than most commercial banks and often impose stiffer terms on borrowers. But they are in the marketplace and ready to deal.
“Lenders got much more conservative last year and started ratcheting down their advance rates,” said Lawrence Hurwitz, whose Los Angeles firm, Lawrence Financial Group Inc., arranges debt financing for small and middle-market businesses.
“This means they might advance against only 20% to 50% of your inventory, leaving you with substantial capital locked up in inventory that you can’t finance.”
The new lenders see special opportunity in Southern California, Hurwitz said.
“Commercial banks got overly aggressive here, and when the chickens came home to roost, everybody reacted to the other extreme,” he said. “I think the nature of the economy in Southern California is such that we have a higher velocity of business activity than other parts of the country--and so more change and growth. So there is more demand here for business financing and a greater willingness to take on risk by both business owners and their lenders.”
The new lenders are not for the faint of heart, however, Hurwitz said. Their interest rates and fees can range between 16% and 20%--far more than the prime plus one or two points paid by many solid mid-size business borrowers on commercial-bank financing as recently as last year.
Those fees don’t scare away entrepreneurs like Willard, however. His father, Robert Willard, founded Willard Engineering in 1950. The company did $1.5 million a year in sales when the son took over in the middle of the last decade. It does $7 million now, employing 23 people in a 9,200-square-foot plant in Santa Fe Springs.
The younger Willard took the offer from UPS Capital for a $1.2-million working-capital loan tied to his receivables--a good fit, because he is considering an acquisition or two and his line of credit will increase with his receivables. Set up last year, the loan was the biggest UPS Capital had posted to its books at the time, Marchbanks said.
“It’s more expensive,” Willard said of his loan, “but my credit line grows with my sales, and I bought the company from my dad with the intent of aggressively growing it. I started to look for alternative sources of financing even before Sanwa pulled the loan. I talked to CIT, GE Capital and some others, and UPS Capital Corp. was just head and shoulders above the others in dealing with us and in working to understand what we do.”
UPS Capital likes its chances as a lender to small and mid-size businesses, said Irene Moore, director of marketing communications. This year, UPS closed a $78-million deal to buy First International Bancorp Inc. of Hartford, Conn., which typically originates loans backed by the U.S. Small Business Administration and the U.S. Export-Import Bank.
“Our belief is that if our customers grow, we grow,” Moore said. “We move between 5% and 7% of the gross national product, and we also move enormous amounts of information. What was missing was the flow of funds. So in 1998, we founded UPS Capital to provide our customers with end-to-end commerce solutions, from goods to information to funds.”
The new lenders see special opportunity amid the current economic slowdown, said Theodore L. Koenig, president and chief executive of Hilco Capital.
In the 1990s, asset-based lending grew from a $25-billion industry to a $300-billion one, he said. “And if it was expanding at that rate in the best economic times we’ve seen since the Depression, we thought it would be likely that when times got tough and the economy slowed, there would be a huge need for the industry.”
Hilco Capital advances as much as 80% of appraised value in making equipment loans, Koenig said, typically targeting companies needing anywhere from $3 million to $10 million. The company seeks to give its investors a return of up to 25%, so like the other new lenders targeting small and mid-size businesses, it doesn’t hand out cheap money.
Whatever the terms, the new lenders make it possible for solid companies to grow even in the midst of an economic slowdown, Willard said.
“These guys are aggressive, which is why they charge more,” Willard said. “I wish I could lower my interest costs, but I’m pretty happy with my deal because it’s already allowed me to make one acquisition and I’m getting ready to do another. It’s a very nice tool.”
Juan Hovey can be reached at (818) 709-6420 or via e-mail at jhovey@gte.net.
