CASE STUDIES IN FINANCING MOBILE DOCUMENT SHREDDING TRUCKS

 THIS ARTICLE WAS PUBLISHED IN THE NAID NEWSLETTER - WINTER 2002

 David Murray has been financing equipment for companies in the document destruction industry since 1998. He says of himself, "I am probably the only person in the country who has seen the financial statements of over 50 document destruction companies." David owns a company in Portland, Oregon called Evergreen Financial and can be contacted at 800-239-3814.

EACH FINANCING REQUEST IS DIFFERENT

There are some common strands that run through almost the entire industry. The story I am about to tell is really a composite of many companies who have one of the common strands. (UNDER CAPITALIZED VERSUS GROWTH).

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CASE STUDY #1

I just financed a new mobile document shredding truck for a company (The Company). A short time later, the truck was operating at capacity four days a week. What should The Company do now? Under what circumstances, is it the right thing to do (A) "SIT TIGHT - NOT GROW" and when should The Company (B) "GET ANOTHER TRUCK AND GROW".

BENEFITS OF SITTING TIGHT

It is more comfortable to keep debt lower, have fewer employees, etc. The Company will probably be more profitable this year if it doesn't get the second new truck in a short period of time. Because of getting two trucks in such a short period of time, The Company will have to go to a higher rated lease company to get the second truck. The Company thinks it probably couldn't get the next truck financed anyway. The Company thinks it got lucky finding as much business as it has now and new customers are hard to get. Each reason to SIT TIGHT has some merit, and the reasons go on.

BENEFITS OF GETTING THE NEXT TRUCK NOW

The Company's value is a function of revenue, not profit. When the existing trucks are at capacity, not getting another new truck will retard profit in every future year, but this one. Not getting a new truck will retard revenue in every year.

Now lets talk about the money. In general, it costs about $10,000 per month to keep a truck in the field and the truck will generate about $25,000 per month in revenue (plus or minus $5,000). A truck that is busy four days out of five is probably generating $20,000 per month in revenue. The truck is already generating $10,000 per month in gross profit and that number is likely to increase. In reality, the next truck is already paid for. When the second new truck this year is at capacity, The Company's revenue is going to be $50,000 per month higher than the beginning of the year and the gross profit will be $30,000 per month higher.

People tell me a business is worth 24 times monthly revenue. Each truck operating at capacity increases The Company's value by $600,000 (24 months by $25,000). How soon do you want to increase your business worth by $600,000? How would it feel to increase your company's value by over $1.2 Million per year? Maybe you should develop a marketing program that will allow you to get a truck up to capacity every six months.

When will it be easier to get another truck up to capacity, this year or next? The sooner the marketing effort is put into finding the new customers, the easier it will be. Even if lease or financing rates are higher on the second of the two trucks (which may or may not be the case), they will only be a couple hundred dollars per month higher. Compare that couple hundred dollars per month to the $15,000 per month in gross profit generated by a truck at capacity. Compare that couple hundred dollars per month to the increase in personal net worth of $600,000 for each truck operating at capacity.

THE PROOF

My dad used to say "don't take financial advice from poor people". I have described one problem with two potential solutions, SIT TIGHT OR GROW. Obviously, I can't say which is best for any company. How do you know which is right for you? Lets look at the industry leaders. Lets look at the most profitable companies. Lets look at the operations you wish you could become. Once you have identified those companies you would like to become, divide the number of trucks they now operate by their number of years in business. You will see they added two trucks per year in most years of their existence. Those companies had to suffer through times when they were uncomfortable with the new debt. Those companies suffered through times when they might not have reported as much income as they would like. Those companies may or may not have paid some higher rates on trucks. However, those companies became successful operating companies. Who do you want to be?

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CASE STUDY #2

Many of the document destruction companies that I work with are highly leveraged. After three or four years in business, their accounting and tax Net Worth is often about or below zero. This happened because the first couple years, they lost money. By year three or four, their equipment is greatly depreciated and is no longer of any value for financial accounting or tax purposes. The normal write down of the trucks combined with the losses the first few years is greater than profit from inception (usually last year and "year to date" this year). From an operational point of view this is meaningless. However, normal lenders use this information to turn down transactions. Many of my lenders, who are well educated in your industry, overlook these flaws.

WHY AM I TELLING YOU THIS?

If you apply for credit and get turned down, please don't give it a second thought. Your bank is not making their decision based on your ability to pay back the money. You would think that is the criteria, but it is NOT (a lesson it took me many years to understand).

The "BANK" evaluates your transaction based on guidelines developed for all industries and imposed upon the BANKER by the bank AUDITOR. Your BANKER really works for the bank AUDITOR, not you and not the Bank. Whether this is good or bad is not the point. It is just the way it is.

How does your BANKER tell you this? The BANKER most likely will not tell you "like it is". The BANKER'S goal is to have your checking account relationship. Many BANKERS fear that a turn down will cause you to change banks. Therefore, when they turn the transaction down, they try to sell you on the fact, you shouldn't be getting any more debt. They tell you to wait to get a new truck until your balance sheet is stronger. Your BANKER really wants your checking account relationship. The BANK loves to get money from checking accounts such as yours and lend it to the largest companies in America. When the BANK has one big loan to a very big company, bad debt is less, administration costs are less, and there are other benefits.

I recently talked to a document destruction company, who decided not to grow and get another truck, because of how the BANKER turned them down. The BANKER convinced them they couldn't handle the new debt. The BANKERS understanding of the overall growth in the market place is irrelevant. The BANKERS understanding of your marketing effort and corresponding successes is irrelevant. The BANKER'S understanding of your business's long term value is irrelevant.

It is not uncommon for a document destruction company which is less than four years in business to be turned down a couple times. It happens all the time. The goal is finding the lessor who understands your business and is willing to overlook the flaws in your file and finance another truck for you.

Now you know what Evergreen does. I find those lessors. Notice I said "find" instead of "found". Those lessors are changing all the time. I just found a new lessor who understands one segment of the industry and is going to be a tremendous help in that segment. They approved the first two transactions I sent them. One transaction had been turned down a number of times and the other was a new business.

I read your file and understand its strengths and weaknesses. I place your transaction with a lessor who appreciates your strengths and overlooks your weaknesses. I continually try to find new lessors who can help our industry. Simple words, but hard to put into effect.

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CASE STUDY #3

THE NEW BUSINESS . We each started our business with a different set of strengths and weaknesses. For example, one new business owner might have extensive experience working for other companies in this industry. Another new business owner might have extensive experience owning other businesses. One new business might be extremely well capitalized. Another new business owner might have outside sources on income, such as owning another business.

Weaknesses include having no experience owning a business. Another weakness is having little working capital to start the business. A third weakness might be having damaged personal credit.

Over the years, I have developed relationships with lessors who have different needs and wants. They require the file to have different "strengths" and they are willing to overlook different "weaknesses". I have had a number of businesses that will get turned down for a specific "weakness". I submit the file to another lessor and they will not even recognize the "weakness".

Some lessors will only finance a certain type of equipment. Some will only finance equipment for businesses in a certain part of the country. Others will only approve transactions where the business owner, owned another business. Two lessors, will give us an extremely aggressive approvals if the business owner has extensive personal net worth. One lessor describes their key criteria as having a "backdoor" to the deal. By that, they mean there is something going on outside the business that is extremely positive, such as outside sources of income, i.e. the outside guarantor or spouse of the business operator is well employed outside the business. This lessor says they will sometimes take additional collateral outside the business to shore up a transaction. I have not facilitated that type of transaction yet.

Many will visit or at least talk on the phone with the business owner. Many of these lessors are extremely interested in the business owner's character. Good personal credit is always a key issue. I cannot think of a transaction where I have secured an approval if the new business owner didn't have good to above average personal credit.

Even though I have been financing mobile document shredding trucks for years, I am always developing new lessors. I have found two new lessors in the past three months, who are ready to fund equipment for mobile document shredders and others in the data destruction industry. Here is what I do at Evergreen. I read your file and understand its strengths and weaknesses. I place your transaction with a lessor who appreciates your strengths and overlooks your weaknesses.