So he went with the bank

By: Chuck Barrow

Mr. Jones owns a small furniture manufacturing company in Tampa.  He recently applied at CapStar to lease a $35,000 automatic edgebander.  This machine would do the work of several employees, improve quality, reduce scrap, and easily pay for itself.  But, more important, this automatic machine would increase his production capacity fourfold, allowing him to bid on those larger contracts that were always out of his reach.

We approved the application for Mr. Jones, but so did his local bank, and the bank’s payment was a little bit lower.  We explained the advantages of our lease:

  • Preserving bank credit lines, vs. using them.
  • No additional collateral, vs. a blanket lien on all company assets.
  • 1 payments in advance, vs. 20% down payment.
  • Fixed rate, vs. floating (remember Jimmy Carter’s 21.5% rates!).
  • 3 yr. lease write-off, vs. 7 yr. depreciation.
  • Stronger balance sheet, vs. increased debt.
  • etc., etc….

But, Mr. Jones really liked that lower payment, so he went with the bank.

Later that year Mr. Jones called us again to ask if we offered accounts receivable factoring.  He said, “I got my automatic edgebander, and I landed one of those big contracts that I’ve been dreaming about with a theme park in Orlando.  They normally deal with larger outfits, but they’re going to give me a try.  This is the break I’ve been waiting for.  If they like my work, and I know they will, it will mean a lot of business for me.  Everything was looking great until we realized that we were going to need another $40,000 in operating capital to cover the increase in accounts receivable, inventory and labor.  I went back to my bank, and I asked for a credit line.  But, even with the new contract in my hand, they declined.  They said my credit was tapped out.  They said my debt ratio was too high now, and maybe they could help me in another year or two, and something about stricter federal banking regulations.”

Well, we could not help Mr. Jones with his need for operating capital.  And, boy was he mad when we explained that the bank’s blanket lien also encumbered his receivables, so he could not pledge them for factoring.

What’s the moral of this story?  It’s hard to get credit at your local bank, so don’t use it up on equipment.  Save your bank lines for operating needs and emergencies.