This is the third column in our series on out of home debt. We’ve previously talked about factoring and out of home lease financing. Today we’ll discuss the pros and cons of using a bank to finance your out of home company. Bank financing is the most common form of out of home debt. Two-thirds of Billboard Insider’s readers have used bank financing to grow their out of home company.
The Pros of Bank Financing
Cheap Money – Bank financing is the cheapest form of debt, provided you can get it. In today’s market, bank debt costs 6-8%. Leasing and private lending debt costs 8-12%. Factoring costs 12-24%.
Bigger loans – Most lenders want to limit individual loan exposure to 5-15% of capital. An average-sized US bank with $1 billion in assets and $100 million in capital will have an individual loan limit of $5-15 million. A really large commercial bank will have a lending limit in excess of $100 million.
Industry Expertise – The larger commercial banks may have a a group of out of home and media lending bankers. This means that they are up to speed on the industry and won’t waste your time with foolish questions.
Other products – If you develop a good banking relationship you can take advantage of ancillary services (e.g. trust, private banking, cash management, bank accounts).
The Cons of Bank Financing
Slow decision-making – Banks generate lots of paperwork. They have to because regulators come in once a year to examine loans to make sure that they are good. This means banks request lots of information and and can take a long time to make a decision. This is especially so if you are dealing with a small local bank and your banker doesn’t understand out of home.
Quicker to the exits – Billboard Insider has noticed that banks enter into out of home during periods of strong economic growth and some banks exit out of home in periods of recession or high credit losses or tight credit markets (1980-1982, post 9/11 and 2008-2010). Out of home companies don’t look like normal borrowers. Collateral does not include liquid assets like receivables or inventory. Net income and tangible net worth don’t exist for most out of home companies due to high depreciation expenses. It’s easy for a bank to call out of home non-core and abandon the market during a recession or during tight credit.
More conservative lending – Banks typically are more conservative than other lenders. A bank keeps 1 dollar in equity on hand for every 10 dollars in loans and the loans have low interest rates. This means that the bank has to be right 90% of the time of it will become insolvent. A private lender may keep a dollar of equity of every $2-5 in loans and the loans have higher interest rates so the private lender can afford to be wrong more often without going out of business. That’s why your bank may seen conservative with lots of restrictions on how much you can borrow and lots of covenants restricting what you can and can’t do.
Shorter loan amortization – Most bank lenders are reluctant to go beyond 7 years when making term loans because their funding relies on shorter term time deposits. This can pressure cashflow if you use bank debt to build loan term billboards where a 10-15 year amortization is more appropriate.
Billboard Insider’s Take: Bank financing is a cheap way to grow your business but keep other debt alternatives in mind if you need to move fast or want a creative lender with staying power during a recession or tight credit.
What have you learned about using the bank to finance your out of home company? Email davewestburg@billboardinsider.com and we’ll run a followup post.
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We have previously explained why factoring isn’t used much by out of home advertising companies. Today we talk with Tony Hull of YESCO Financial Solutions about billboard lease financing.
