NEWTON, MA -- Where did all the money go? Over the past year, bulk vendors and other coin machine operators have seen their credit lines sharply reduced or canceled altogether. If that weren't bad enough, in many instances credit card limits have been significantly reduced, too, adding insult to economic injury. Reports from the field indicate that even operators with pristine credit ratings and profitable locations have not been immune to the credit crunch that has stalled plans for expansion and new equipment for the past year and a half.
The cause, according to the experts, is easily explained. In the wake of last year's near-meltdown of the financial services industry, banks tightened up their lending practices to an extreme degree, particularly in dealing with small and mid-sized businesses. And those tight-fisted lending policies have only loosened marginally over the past year. A recent report issued by the U.S. Department of the Treasury indicated that the nation's four largest banks – Bank of America, JPMorgan Chase, Citigroup and Wells Fargo – slashed their commercial and industrial lending by 15% from April to October of last year. The total, according to the Treasury report, represented some $100 billion, with loans to small businesses down $7 billion, or 4%.
And then there is the credit card crunch. This stems from a well-intentioned piece of bipartisan legislation signed into law by President Obama last May. Intending to protect consumers from a variety of unfair practices by credit card companies, the lawmakers unwisely gave those issuers until February 2010 to bring their practices into compliance. With the ink barely dry on the new bill, issuers raised interest rates, imposed new fees and cut credit limits. According to a report prepared by the Pew Charitable Trusts, median interest rates on credit cards jumped a whopping 13% to 23% from December 2008 to July 2009.
"I think what is happening now is what happened to a lot of consumers a year ago," said Jim Hines of Firestone Financial Corp. (Newton, MA), a firm specializing in loans to the coin-op industry. "You hear about consumers getting letters canceling their credit cards. Now the banks are evaluating their portfolios and looking at what they have in collateral. And if you're a bank dealing with a route operator, it's hard to get your hands around the collateral. Banks are looking at that collateral and saying, ‘We don't feel that's the most secure part of our business and we're going to tighten up.'"
Firestone, though not a quite household name in bulk vending, is gaining popularity among operators working through the current credit crunch. The company, which boasts a history of more than four decades, has made a concentrated effort to address the needs of the bulk industry over the past several years. And this effort has increased as bulk operators have seen their sources of credit dry up.
According to Hines, the tightening of credit has impacted coin-operated equipment operators across the board, from bulk and full-line vending to amusements. "We've been hearing a lot of stories about banks tightening or refusing credit," he said. "Banks are saying, ‘We don't want to be in your business any more.' And it's through no fault of the operator; it's not like they've done anything wrong. We're living in unprecedented economic times.
"I know one operator in the Midwest who was doing business with a bank since the 1970s," Hines instanced, "and the bank decided it didn't want to lend to them any more. We're getting calls from people we haven't done business with before who say, ‘Look, my bank stopped doing business with me.'"
As Hines noted, a large part of the fiscal equation has to do with a bank's "comfort level" in dealing with "transient" equipment. After all, bulk racks and skill cranes aren't like real estate or even a large piece of manufacturing equipment. A rack of machines could travel a hundred or more miles and pass through several different locations during the term of the loan that paid for it. That's simply the nature of the business.
"I think we have a comfort level with transient equipment, equipment that moves," Hines explained. "We want our operators to make money. Banks don't have the kind of comfort level that we do. We tend to look more at the cashflow versus revenues and profit. We understand the cash nature of these businesses, which allows us to get our arms around the cash finances of the companies we're doing business with."
Hines recalled that Firestone has been active in bulk vending financing since the mid-1990s, but has seen a real upswing in the segment during the past five years. "It's not unlike music and games operating. The collateral is a little different," Hines said, "but the nature of the business is less so. Whether it's a crane operator or a bulk vendor, what's needed is to make a margin on your product and get consumers to put money into your equipment. One thing we are seeing is a growth of hybrid operators. It's not someone doing just bulk vending, but also photobooths, kiddie rides and cranes. Diversification is good for the operator."
This type of diversification by bulk operators into higher-priced equipment has also been good for Firestone's business. As operators moved into cranes and merchandisers, they naturally sought the kind of credit traditionally used by amusement operators. Vendors who would normally buy their equipment with credit cards or cash have switched to Firestone for their capital investments, often continuing to put the merchandise on plastic. "We try to keep our loans to $5,000 and above," said Hines. "I think it allows them to use debt on a smaller scale. We enable them to get a term loan for $6,000 or $7,000 to buy that new piece of equipment. And it leaves them more resources to buy product."
Another consequence of diversification into higher-priced equipment over the past decade has been the increasing professionalism of the bulk vending industry. Nearly gone are the veteran operators who kept their financial records on napkins or paper bags. Even relatively small operators nowadays keep accurate financial records, which Hines sees as a real plus.
"In today's economic climate, the more professionally you can run your business and the more financial statements you keep to show the value of your business, the more willingness you're going to encounter from lenders," he said. "It's also important to have multiple sources of credit. Having a track record with us is a big deal. We continue to lend based on that history."
But is this the time to acquire more debt? These are, after all, uncertain times. And operators, as Hines sees it are wary. "I think this has been a transition year for a lot of people," he said. "They're afraid of buying new equipment. They're worried about debt and they may be gun-shy, given everything that's gone on in the economy. But you need to have some debt in order to grow and maintain your business. As long as it's measured growth and the cashflow carries the payments, it's a great way to grow."