Too good to be true?

 More banks are now starting to provide finance, but they remain cautious. Many printers will struggle to get loans. Some will turn to vendors. Experts say they should treads carefully and get their business in order first. It hasn’t always been a match made in heaven.

Keen to get their hooks into the printers’ business, history is littered with examples of some vendors offering deals that sound perfect, like where the printer does not have to make any repayments for the first 12 months. The problem starts when the printer is hit with its first invoice 12 months in. It doesn’t help if a piece of equipment worth $500,000 when it was bought 12 months ago is now worth $250,000. Unfortunately, the Australian printing industry has experienced its own version of the US sub-prime mortgage crisis, where predatory lenders were pressuring uneducated people without jobs into taking loans.

Of course, the vendors lending the money are doing it at a premium to the bank rate. They have to do this because of the risk in financing a company the banks won’t go near.

The vendors haven’t had it easy either. When printers go out of business, vendors get cleaned out. For example, when Melbourne company Document Printing Australia entered liquidation last saddled with debts totalling over $5 million, the creditors list included $656,000 debt owed to Fuji Xerox Australia. It’s just
one of many cases where a vendor found itself badly exposed.

Finance broker Wade Oldham says printers need to be very careful when they enter these sorts of cosy arrangements. “There is no such thing as a free lunch; it’s probably going to be too good to be true at some point.”

“It may not be this year, it may not be next year, but it will get them.”

Oldham says some companies parade as vendor financiers that are not. The real ones, he says, include Canon, Fuji Xerox, Heidelberg, HP and Konica Minolta.

Beware of imitations and sweetheart arrangements. Oldham cites deals where machines were bought at a price and given 12 months to settle. Then 12 months later, finance is declined because the current day value of the machine is much less, leaving the printer in an awkward position.

The big problem, he says, is that some of these deals are structured in a way that lets the vendors get their hooks into the printers’ business. Fiddling with click charge rates and capital cost creates the smoke and mirrors theory. “If a bloke finds out in three years that the equipment is not performing well and wants out, it will end up costing him a fortune to change brands,” he says.

Jagar Sprinting director Malcolm Gasper uses Fuji Xerox for some vendor financing, with the rest done through the banks. He says many printers have had no choice in the last two years but take up a deal with a vendor.

“Last year and the year before, the banks were totally kyboshing the printing industry. Printing was on the black list,” says Gasper. “We bank with Westpac and they were very straightforward. It was one of the industries that they would not be pursuing in terms of financing because they saw it as one of the industries that was going to suffer. Vendor financing was the only way to go.”

The vendors have one advantage. “They are more flexible because at the end of the day, they see some value in the equipment, which can be relocated if someone falls over, whereas the bank doesn’t want to be owner of a piece of secondhand digital printing equipment.”

The big problem, says Gasper, is that the capital cost is only one item that has to be paid for. There are also consumables such as the ink knives, filters and cylinder jackets, and then there are servicing costs. That is a completely different bill, one on top of the capital cost. And that can come out to a lot more than the initial outlay.

“In reality while capital equipment is expensive, if you spend a million dollars on a press, you would probably owe two to three times that to the vendor in service charges. The most expensive part of owning large digital equipment is the service costs, not the capital costs,” he adds.

Paying for servicing comes out of the printer’s turnover. That leaves many in a position where they have to get money in quicker and slow down payments to others. And that can be a dangerous game. With so many business failures in the printing industry over the past two years, it has cut both ways.

“The problem is that when a company is in trouble, it tends to slow down the payments so the amount outstanding on the vendors’ books grows,” says Gasper. “One would assume that the vendors are carrying more money owing for service and in some cases repayment for equipment than they were carrying
two years ago.”

He says printers entering these sorts of deals need to become more rigorous in pursuing payments, something most tend to struggle with.

While banks are starting to lend money again, they will only help companies that show they have a strong cash flow. And that leaves printers with few choices.

“What options do some of the printers have? They have to keep up to date with technology, they have to keep moving forward or they go backwards. That’s the call they have to make at the time.”

The suppliers have clear views about how it should work, in an ideal world.

Manroland Australasia managing director Steve Dunwell says his company will not enter into vendor financing arrangements. It’s too messy and risky.

“We are not a bank. We sell equipment and get finance companies to finance equipment. We do not wish to be a bank,” says Dunwell.

“If we do the finance, we would do it with the backing of a finance company. But generally, there is more premium that we would have to add whereas it’s best if our customers get the best rate from the finance companies of their choice.”

In the end, he says it’s best to leave financial arrangements to the finance companies. After all, no vendor enters an arrangement without the backing of a bank. “To my way of thinking, they might as well do it directly with the finance company,” says Dunwell.

Is he concerned that he would lose out on customers by refusing to provide finance? “The vendor is basically supporting the company and we don’t see that as our role,” he says. “I have always believed that and that’s in my 30 years experience in this business.”

He is also scathing about some of the deals offered by fly-by-night operators. “Some companies have done deals with printers that can’t get finance and they have given them extended payment terms and created what is an unreal situation and the minute they have to pay monthly for the finance, they can’t afford it because they haven’t built their business correctly.”

The lesson for printers is clear. Get your own business on solid ground before you enter any vendor financing arrangement.

Heidelberg ANZ managing director Andy Vels Jensen says his company only extends finance when the loan is analysed and put through checks and balances. Heidelberg runs its ruler over the printer’s business. “We know their numbers, we have a better understanding of their business plan and their ideas and marketing and what future steps they
are looking at,” says Jensen.

He says the established vendor finance leaders only extend the funding with the backing of the bank. And they only get that when they put up some security for the loan. “For the first 12 to 18 months, they fear something could happen. If nothing happens, they’re very happy to take it off our books. We take on these temporarily and then hand it over to the banks,” he says.

He is very critical of the deals that some printers enter with some vendors offering the lowest possible terms. He acknow­ledges that Heidelberg has lost some business but, at the end of the day, the deal usually collapses when the printer is mugged by reality and has to start repaying. “I have seen only one out of 10 that works. Nine out of 10 end in tears.”

The bottom line is that printers seeking finance from a reputable source need to have a good business plan and a good payment record, says Vels Jensen.

Zenith Finance managing director Richard Korda says he has heard of
sweet­heart deals where the vendor even makes the first two payments themselves, or where they extend two years of free servicing. Of course, they make up for it at the other end. The vendor still calls the shots.

Korda says printers need to look carefully at all their costs, including servicing and consumables, before they enter into any deal.

“If you borrow $300,000 and if over five years you pay back $370,000, that’s a reasonable cost,” says Korda. “But if a vendor is offering a machine for $300,000 and at the end of five years, they want $600,000, then you have to work out if it’s going to be profitable.”

And that is the critical part for printers. Look at the overall costs, and see how they measure up against the business. Otherwise, as Vels Jensen says, it will end in tears.

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