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Fair weather friends turn cold – Print21 magazine feature

Tuesday, 30 August 2011
By Print21
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There’s a widely-held belief that, in the wake of the GFC, printers are being shunned by the big banks, just at a time when many companies are looking to secure financing for new investments. But how true is it? Does the printing industry have an image problem with money lenders, or are there other issues at stake? Simon Enticknap investigates.

It’s been quite a while since any finance company or bank called me wanting to spread the good word about how much they value doing business with the printing industry. Not that it used to happen a lot but certainly there have been times in the past when the money lenders were keen to be seen as good friends of the industry, the sort of mates who could be relied on to help out a printer in his time of need.

Back then, printing was regarded a relatively ‘safe’ industry to be involved with; good printing businesses generated strong cash flows, the assets, by and large, held their value, and many companies were family-owned businesses with deep roots in the industry and good credit records. There was something sturdy, solid and reliable about printers, not at all like those fly-by-night operators.

How times change. The after-effects of the GFC have sent shockwaves through the industry and changed the perception of it in some people’s eyes as a good bet. The collapse of well-known companies and the widespread consolidation of the industry, particularly in the commercial print market, has created uncertainty amongst lenders to the extent that fewer and fewer seem prepared to take a risk and support what is viewed as a declining industry. Banks have tightened up their lending requirements and are much more likely to refuse an application that would have been given the nod in years gone by.
That’s the perception anyhow, but how realistic is it? Is the printing industry really on the nose with today’s money lenders?

One person who has experienced first-hand the changing landscape of print finance is Maurie Shakespeare of Heidelberg Print Finance. Over the past decade or so, he has witnessed how the lending policies of finance companies and the banks have changed with regard to the printing industry and the impact this has had on local print businesses.

For instance, when Heidelberg Print Finance first started, its role was mainly as a conduit through which printers could obtain financing for their equipment purchases from a range of lenders, of which there were several.

Since then, Shakespeare says the number of lenders prepared to offer finance to the printing industry has declined significantly. At the same time, the Big Four banks have also been making it harder for printers to obtain credit. The result is that Heidelberg Print Finance has had to take on a bigger role as a lender to the industry, albeit reluctantly and not through any desire to enter the world of finance.

Two years ago, when Print21 last interviewed Shakespeare about finance for the industry, the story was one of finance companies withdrawing from the market and the big banks making it harder for printers to get approval for finance. This time around, he says the story remains the same.

“From where we sit, there’s been no real change in the appetite of the banks over the last two or three years,” he comments. “It’s still extremely difficult for clients in the graphic arts industry to get funding done through the banks, and the number of sources external to the banks is extremely limited.”

The irony of all this is that now is actually a good time for printers to be thinking about dusting off those investment plans. The Aussie dollar, at record levels against the Euro and US dollar in recent months, is working in favour of local printers looking to import equipment from overseas; as anybody who has travelled to Europe or the US recently can testify, the local dollar goes much further these days. At the same time, interest rates seemed to have become becalmed at a lower level than they were just prior to the onset of the GFC with little prospect of rising in the near future.

The result is that for those businesses that can obtain finance, current purchasing conditions are as good as they have been for some time. Of course, that’s not a reason in itself to go out and buy a new press—there’s no point in investing in new equipment if the market won’t support it—but it is a significant factor in companies’ purchasing decisions. The question is whether, given the current economic conditions, the lending drought is acting as an impediment to companies wanting to invest.

Printers are not alone

It is a question that has occupied the minds of more than just printers. Last year, a Senate economics committee handed down a report (Access of Small Business to Finance, June 2010) investigating the current state of financing for small businesses (which includes the majority of print companies). The report acknowledged that lending to SMEs had fallen since the GFC and that many small businesses were reporting difficulty in obtaining credit and were having to pay more for it.

Not surprisingly given the nature of these all-party committees, the reasons given for this state of affairs were equivocal at best. On the one hand, the slowdown in small business lending was attributed to a fall-off in demand from businesses in the wake of the global recession and the fact that many companies had adopted a more conservative approach towards taking on debt.

On the supply side, it was noted that banks had tightened their lending require­-ments having “tended towards recklessness in the preceding boom”, and that there were less funds available among non-bank lenders. As to who was to blame for the current lending drought, well, in the words of the report: “Witnesses were reluctant to apportion the roles played by these various factors.”

The point is that many of the factors affecting lending to the printing industry are common to other industries and small business in general.
For instance, as the report suggests, lending to farmers, another small business sector, has likewise been hampered by the flow-on effects of the GFC. In addition, it’s clear that not all businesses, large or small, have been affected to the same degree. Several business surveys suggest that only a minority of businesses have been negatively impacted by credit issues, while others suggest it is the cost of credit rather than its availability which is the critical factor.

Closer to home, Markus Haefeli, MD of equipment supplier Ferrostaal, is scathing of the idea that the printing industry has been singled out as a “bad risk” by the banks and finance companies.

“People often say ‘the banks aren’t financing’ but we’re asking banks to finance companies that have no positive equity, they have been losing money for the past two or three years, they don’t know where they’re going in the future—why would you lend them a million dollars?
“We’re asking the banks to do very stupid things and these guys are not stupid.”

Haefeli says companies with healthy balance sheets and a strategic plan for the future should have no problem financing their plans, and he lays down a challenge to anybody who says they are being shunned by the banks because of the industry’s image problem.

“If the business is well-run, has a strategy, a positive balance sheet and is profitable, there should be the capability for a business like that, whether it is in the printing industry or the refrigeration industry, to gain financing and funding.

“Anybody in the industry who has a positive balance sheet, who is profitable and has liquidity to prove they are sustainable in the future, I will find them finance and I guarantee it.”

When vendors become lenders

Whatever the reason for the perceived credit drought, one of the consequences has been to underline the increasingly important role being played by the equipment vendors as financiers.

Heidelberg Print Finance is one example of a vendor finance service that has morphed from being effectively a broker for financing arrangements to actually financing its own sales. In the digital sector, vendor finance from the likes of Fuji Xerox, Canon and HP is common­place and these days accounts for the majority of equipment deals. In effect, these vendors are bankrolling the growth of the industry and making it possible for printers to keep on investing in new technology.

Cynics might argue that vendors only become lenders in order to sell more equipment, and to some extent that is true. That is their purpose after all. Vendors on the other hand are more likely to see financing as just one of a number of services they provide to their customers in order to ensure their business success. Either way, there’s no doubt that vendor finance enables deals to be made that would otherwise get knocked back by the banks.

So why are vendors prepared to sanction deals that banks and other third party lenders would not approve? Maurie Shakespeare says it’s not that the vendors have less stringent requirements than the banks but rather that vendors often have a better understanding of the impact on a business of a new piece of equipment.

“It’s very hard to get across to somebody outside the industry exactly what new technology does for a business,” he comments. “We have a better understanding of that because we see it time and time again, and through our consulting work can ascertain the value of the proposition as well as its potential for being successful.”

These days it has become standard practice for banks to fully secure all loans against fixed assets such as the family home or to require personal guarantees. They are no longer prepared to provide finance on ‘soft’ security such as cash flow or goodwill. In effect, the banks want to eliminate all risk from the deal by securing it against only those tangible assets which it understands.

By comparison, Heidelberg still applies the same criteria to any finance application as do the banks, but it also takes into account future cash flows and cost savings that may arise as a result of having the equipment in place. Likewise, Shakespeare says Heidelberg doesn’t demand security such as ‘fixed and floating’ charges and only in rare circumstances does it insist on security such as family homes.

“That’s really indicative of our better understanding of the industry because, although we do operate exactly as a lender and have the same information requirements and approval process as a bank, we can interpret the data better due to our knowledge of the industry,” he says.

Heidelberg Print Finance is only available in a handful of countries around the world including Germany, the US, South Korea and Eastern Europe, and it reports directly to Germany rather than to its local units. Shakespeare says the fact that it operates here is an indication of the lack of competition between lenders and, consequently, a smaller appetite for risk.

While the original motivation behind setting up Print Finance was to enable Heidelberg to present a single point of contact for all sales transactions, including financing, its role has continued to expand and develop. Now, after 11 years at the helm, Shakespeare is handing over the finance role to Con Xanthos, commercial manager and company secretary, later this year. Xanthos says the company has the full support of Heidelberg in Germany to maintain its vendor finance role.

“It’s an integral part of the sales effort in this market and will continue to be here,” he commented.

More than just finance
So is the growth of vendor finance simply a response to a shortage of lending options in Australia or does it serve other purposes too?

In the digital sector, vendor finance is well-established and is accepted as a normal part of doing business. Simon Lane, national manager, graphic communications at Fuji Xerox Australia, describes it as being “in our DNA”, pointing out that from the early days of Xerox in US, vendor finance has been a key part of growing the business. Today in Australia, the majority of Fuji Xerox’s sales are financed through its own finance operations.

“It’s a really critical piece of our offering to the market,” he comments. “It’s a key differentiator for us. We’re one of only a couple that offer our own finance operation and it does potentially give us flexibility that other vendors might not be able to offer.”

Stephen Doherty, manager of Fuji Xerox Finance, says competition from the banks has dropped off over the past 24 months and while major customers always remain attractive to the banks because they are perceived as being more secure, at the smaller end of the market, it is often only the vendor who is prepared to take the risk. In part, Doherty says, this is because vendors are aware of the opportunities to sell additional services to the customer other than just financing.

“For a vendor finance company, there are three or four reasons to do a deal with a customer whereas a bank has only got one reason,” he comments.

In part too it is a reflection of the rapid development of technology in this sector. The payback period for digital equipment is generally much shorter than with offset machinery (although even here it is becoming much faster) so the question of refinancing is never far away. The need to upgrade equipment is a constant factor, particularly in production colour. In that regard, Doherty says vendor finance is a good option as banks will typically want to see out any lease arrangement to the end and may impose penalties for early termination. In contrast, vendors can afford to be more flexible if it involves refinancing in order to upgrade equipment.

“One of the advantages of vendor finance is that we make it fairly easy for a customer to do that,” he explains.

Ultimately though says Doherty, it’s not just a lack of third party options or the ease of refinancing that makes vendor finance the preferred choice amongst digital printers. It’s also because, when the going gets get tough, there’s an expectation that the vendor is more likely to support the customer than a bank will.

“It’s our job to work closely with our customers through these tough times to try and get a better solution for us and the customer at the other end,” he comments.

While the banks may appear to be giving the printing industry the cold shoulder at the moment, this is more a reflection of the banks’ appetite for lending post-GFC than any indictment of print. In these times of need though, it’s useful to know who your real friends are.

Terms and conditions

There are as many ways to finance capital equipment as there are ways of separating a feline from its fur. In part this reflects the variety of equipment that is available to buy, from a simple desktop spiral binder up to multi-million dollar presses. In general though, the two main methods of financing a deal are hire purchase or leasing.

HIRE PURCHASE: With hire purchase, the borrower actually owns title to the asset and pays it off over a set period of time while claiming depreciation on the asset. Typically, hire purchase is used for larger items with a longer service life. At the end of the hire purchase agreement, the borrower may have to pay a residual or balloon payment, or they can make higher repayments and end up with no balloon.

Maurie Shakespeare says the majority of deals with Heidelberg are hire purchase with a maximum length of seven years with no residual. Where possible, shorter payback periods are supported.

“Yes, we encourage shorter terms but as with any investment it’s always a balance between affordability and cash flow and future upgrade path,” he commented.

Fuji Xerox also offers a hire purchase option which was introduced at the time of the government’s investment allowance incentive a couple of years ago. Stephen Doherty says that for the period of the incentive (which required a hire purchase or chattel mortgage arrangement), it was a popular option but has dropped back since then.

“The investment allowance period certainly helped to close a lot of deals that would have taken a lot longer in that period.”

LEASING: This is a bit like a rental agreement whereby the finance company buys the asset and the borrower pays the financier for the use of it. Unlike rental however, ownership of the asset transfers at the end of the lease term when the borrower pays a residual amount that represents a realistic value of the used item. Typically the monthly payment can be claimed as a tax deduction.

“This is probably the most used product in the graphics industry,” says Stephen Doherty. “It gives customers more control over their equipment than a straight rental.”

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