Beyond the Bank

In this new economy it is more important than ever to be prepared prior to the acquisition of new equipment. Most finance sources are looking for reasons to say no rather than yes, so having all your ducks in a row prior to seeking financing is key.

Document destruction is a specialized industry, and your local bank likely will not understand the equipment you are seeking to acquire. Even if your local bank has been there for your past financing needs or if it uses your shredding services, document destruction is a niche business, and the banking business has fundamentally changed in light of more regulation, tighter lending standards and the need to raise capital reserves.

We have seen an increase in last-minute deals where the client was told he or she was approved, signed the necessary contracts and was given a deposit only to find out that the funding source had dried up and could not further fund the deal. Some of this can be attributed to brokers jumping the gun by locking up the client before having approved financing. An industry practice with brokers has been to get a client to sign contracts while the broker continues shopping the (promised) deal. The problem is that the financing well is running dry, and many of these promises go unfulfilled.

The good news is that there are lenders available that specialize in shredding trucks and equipment that know and understand the industry. It’s in your best interest to deal with a lender that understands your business.

If you are looking at getting into this exciting industry, the good news is that there is still room for you and your new company. Significant planning will be necessary to get your new venture off the ground, and the first step is to build a strong business plan.

The biggest mistake you can make in this industry is to be unrealistic with your goals. The idea here is to put a budget together that is obtainable and that factors in all of your operation’s fixed costs. After doing this, you may find that this is not the industry for you.

Unfortunately, some lenders that have little experience with the destruction industry will fund a new industry venture without knowing the costs associated with it. Many times, a business starts off with cash reserves that are so low that failure is certain. A good rule of thumb is to keep six months of cash reserves on hand when starting out. Without that, you might get better odds of success in Vegas.

Brokers sometimes do not have a vested interest in your success. If you fail, often they have already made their money and they don’t share in any of the risks. Therefore, you may want to make sure that the lender you are dealing with is a direct lender and will not be selling your note the second the ink is dry.

The last few years have really changed the economic face of the mobile document destruction industry. In just in the last year, we have seen the price of diesel go as high as $5 per gallon. While the price has dropped since then, it does not make up for the plummeting price of paper, which, depending on your part of the county, may have gone down by as much as 80 percent. These factors have greatly affected the bottom lines of all destruction firms.

The fact of the matter is many of the banks that were actively seeking your business two years ago have now been crushed by bad mortgages and are looking to finance businesses they understand. Guess which business your local bank likely doesn’t understand?

Transactions for off-site equipment can be more difficult to fund and require greater preparation and attention to detail. Among the things you have to consider is that most equipment has an environmental impact that may require special permits and licenses to operate. You will need to factor in all of the costs associated with setting up your plant beyond the obvious costs of equipment and physical location.

If you are renting the space you are going to use for your plant, keep in mind that you will have to get the landlord’s permission prior to the installation of the system as well as any future equipment you may be planning to add to your facility. For example, if you are installing a shredder and a baler now, what happens five years down the road if you want to add a product destruction system with a conveyor and a sorter? You may think you are getting ahead of yourself, but do you really want to incur the cost of moving your whole operation when your business grows? It definitely pays to have your lawyer draw up an agreement outlining what future equipment may be installed at your plant.

Also, make sure your lender prepares a Landlord’s Lien Waiver to protect your equipment from any outside encumbrances. If you and your landlord ever have a falling out, your landlord cannot file a claim on your equipment because it is not physically attached to the building. You may think you have a great relationship with you landlord, but do yourself a favor and get it in writing.

You will be married to this equipment for years to come. Make sure you know what you’re getting into and shield yourself by having a lender with a vested interest in your equipment from day one.

To determine if this is the case, you may want to consider Intek President Billy Reitman’s "hit by the bus" scenario. Let’s say tomorrow you are crossing the street and are hit by the proverbial bus. Will your business survive and, if not, will your family be able to liquidate the company’s assets without financial loss?

Please view this as a primer to get you started. The substance of what you need to know in your particular situation will vary from case to case, and a knowledgeable lender can help you determine the right course for your company. n