Processing
Financial & Insurance Services

Helping processors grow and prosper

Your financial and insurance services partners must know the basics of your business and its nuances as well.

August 7, 2014
Trans

Every company involved in creating, distributing and selling food has a keen interest in accessing capital. That’s because capital enables a company to do what it wants and needs to so it not only survives, but also grows and prospers. 

 

Companies that are heavily invested in owning assets—real estate, production equipment, transport fleets and the like—often use their own cash to operate their businesses. However, companies that use financing instead of their cash reserves have the liquidity to build their businesses, rather than merely owning and running them. Like financing, insurance can be used creatively to significantly advance the sustainability of an enterprise.

The Equipment Leasing and Finance Association, a trade association based in Washington, DC, represents financial services companies and manufacturers in the equipment finance sector. ELFA President and CEO William G. Sutton says seven out of 10 US companies use some form of financing when acquiring equipment, including loans, leases and lines of credit.

“Each year, American businesses, nonprofits and government agencies invest over $1.48 trillion in capital goods and software, excluding real estate. Of this, about $827 billion, or 57 percent, is financed through loans, leases and other financial instruments.”

So far this year, financing activity remains strong. In April, equipment financing was up 7 percent year over year, and new business volume in the first quarter of 2014 rose 6 percent compared the first quarter of 2013.

“Last year’s cold winter had some negative impacts on the economy, but with reduced policy uncertainty, stronger economic fundamentals and replacement demand, we remain optimistic about growth,” notes Sutton. “This is a particularly good time to finance equipment, because there is so much liquidity in the marketplace. Many funding sources—leasing companies, banks and some manufacturers—are looking to lend because they have the cash available to deploy, making this a favorable time for food and beverage manufacturers to finance production equipment.”


Strong food sector

GE Capital of Norwalk, CT recently interviewed C-suite executives at 50 food and beverage companies with revenues ranging from $10 million to $1 billion. The research focused on key economic, industry and business issues.

“Despite uncertainties around commodity costs, the sector is strong, and revenue and employment are expected to grow,” says Chris Nay, GE Capital senior managing director, food and beverage. “Nearly 75 percent [of interviewees] expect revenue growth in the coming year and a 2.2 percent year-over-year increase in employment. More than half of the firms said they would be adding workers.”

On the other hand, among the top three business challenges interviewees pinpointed was the ability to pass on increased commodity costs. The other two were the ability to maintain margins and the ability to continue revenue growth.

According to the survey data, the majority of food companies do not plan to change their leasing habits in coming years, although 12 percent expect to increase their equipment leasing; 9 percent expect to decrease it, primarily due to the fact off-balance sheet financing—a tactic traditionally used to keep large capital expenditures off a balance sheet so debt-to-equity and leverage ratios remain low—is being eliminated.

GE Capital has a different business model than most other financial services companies, because it has its own leasing division and holds on its own balance sheet a significant portion of the new loans and leases it underwrites rather than selling them to banks or other secondary markets for fee income. The company does this to further its partnership with borrowers.

“Another thing we discovered from our survey,” recalls Nay, “is about 75 percent of [the interviewed] companies plan to lower costs by increasing operational efficiencies through things such as increased automation (47 percent) and replacing old equipment with more efficient units (45 percent). In many cases, these strategies will require financing.”

A further area of focus, says Nay, is food safety. More than one-third of interviewees cited this as one of their top worries. “Many firms are responding to this via employee training, traceability software and new equipment purchases, all of which also need to be financed.” 

Over half the respondents said they expect capital expenditures to be their dominant use of financing in the coming year, with 53 percent saying it would be used for new equipment; 37 percent said it would be used for other things. Meanwhile, over a quarter of interviewees (28 percent) said they are planning to invest in sustainability initiatives to reduce environmental impacts and enhance their corporate and product images.


 

Financing tips

“In the quest for capital, smart and successful borrowers recognize important variables beyond cash flow and credit history,” according to Chris Nay. Here are nine tips Nay says can help borrowers get the capital they need:

1. Reach out early – Approach a lender before you need capital. Build a relationship by educating the lender about your business.

2. Treat your lender as a partner – Understand the lender’s perspective and your shared goals. Be flexible and open-minded.

3. Be transparent – Be upfront. A real deal-killer isn’t negative information or financial setbacks. It’s having the lender invest time and resources researching incorrect information.

4. Tell a compelling story – Highlight successes, market knowledge and problem-solving skills in a forward-looking business plan.

5. Sweat the details – Make sure you understand key terms in your contracts and credit documents.

6. Find the right lender – Look for someone who knows your industry as well as your competitive position and challenges.

7. Maintain contact – Close communication is critical, especially during times of crisis.

8. Think like a lender – Avoid any temptation to amend conditions mid-term, and be sure to contact your lender well before the loan comes due.

9. Optimize cash flow – Cash flow is king. Make sure your lender knows your payment history and those of your customers.

Partnerships matter

Peter Arendt, managing director of food and agribusiness at Huntington National Bank of Columbus, OH, says the food industry is continuing to shift to “nimble, high-volume food processors.” According to Arendt, these companies have developed a keen interest in how their products flow through to the end-consumer and use such things as exchange-traded contracts or contractual agreements with trading partners to protect their returns.

“Today’s equipment financing market is characterized by attractive long-term rates and eager lenders,” says Arendt. When a company is looking for the optimum financial provider, he recommends choosing one that can help the manufacturer lower the cost of acquiring new equipment and provide critical research when determining what equipment to choose. Ideally, the financial partner should be connected with potential vendors and well versed in the client’s cash flow needs, tax benefits and ways of helping the manufacturer reduce debt. “Picking the right financial partner over the long term is as critical as researching and determining what equipment to buy,” Arendt explains.

Chris Nay from GE agrees and adds that leases providing the greatest amount of flexibility are the ones to go after. “Some types of leases, for instance, allow for seasonal business fluctuations, meaning lower or postponed monthly payments while a project is ramping up or running into the slow part of the year.”

For example, poultry companies are backward integrated into chicken farming and forward looking into changing consumer tastes and preferences. “The window of opportunity for a new chicken product before competitors knock it off,” says Arendt, “used to be about 18 months, but it’s getting shorter. That’s why these, and many other food processors, need a flexible partner that can respond quickly with the financing needed to install a new production or packaging line well before the competition can copy their new offerings.”
 

Lease or buy?

Arendt says there are a variety of factors to consider when determining whether to lease or buy.  “Generally, if a manufacturer can’t use all the depreciation benefits of equipment ownership to minimize its tax position, or if it prefers to upgrade its equipment on a regular basis, it should consider leasing over buying.”

A line of credit may be the best way to start a new venture, so the company can remain financially agile in case demand exceeds expectations. Other things to consider are not locking into an expensive production process that might hinder a company’s ability to keep pace with rapid changes in technology, as well as keeping an eye on optimum resale timing when planning an upgrade.

Nay from GE says lease financing generally enables businesses to acquire more and better equipment that may be out of reach for them if they only consider buying it. Leasing also simplifies asset disposal by making it the responsibility of the leasing company.
 

Government funding

Traditional financing goes a long way in helping food processors support business growth. In addition, numerous government incentives—from federal to municipal—provide grants; subordinate long-term, interest-free loans; tax refunds and credits; rebates; and other things to extend a company’s financial resources.

However, keeping track of these incentives can be a daunting task. And applying for them can be equally daunting now that governments have become more accountable for spending taxpayer money. 

“In North America, there are incentives for a wide range of activities, including sales support, production, energy reduction, export marketing, equipment purchasing, R&D, hiring, training, selling to the government, relocation, business expansion and other things,” says David Reynolds, president and CEO of INAC Services Ltd. Based in Guelph, ON, INAC has secured government incentives for more than 350 companies over the past 27 years.

According to Reynolds, government grants in Canada rarely exceed $1.5 million and typically range from $50,000 to $150,000. Subordinate long-term, interest-free loans, on the other hand, can go as high as $25 million, but rarely exceed $3.5 million. “A good thing to remember is these loans do not require security,” he notes. 

Governments also benefit from these programs, because they create jobs, which increase the tax base. Consequently, they look for financially secure companies that can introduce new technology, increase purchases from farmers and create innovative products that displace imports with exports. 

“Government incentive programs come and go,” adds Reynolds, “and our job is to know which programs at any given time are most applicable to each client. A business may deserve funding, but if its application is poorly written, it might not present its case successfully to the funder. Engaging a professional grant writer can vastly improve a company’s chance of success. It also outsources the bulk of the time-consuming work to prepare an application.” 

Some companies need to create new technology or modify existing ones to make their businesses work. Many programs support them as well. In Canada, one of the most generous and yet most underutilized programs of this type is “SR & ED,” short for Scientific Research and Experimental Development. Administered by the Canada Revenue Agency, it is driven legislatively by the Federal Department of Finance.

“Each year, under SR & ED, the Canadian government pays out close to $4 billion to approximately 20,000 companies of varying sizes,” states Todd Louie, director of taxation and technology at Markham, ON-based The Sheldon Group, which specializes in SR & ED consulting. “The main reason more companies don’t apply is that the legislation is highly complicated, and many companies don’t have the capability to interpret it in a way that would produce a successful result for them.”

Most of the applicants are involved in food science, namely companies using their own labs to test the chemistry and interactivity between various ingredients, develop new recipes, extend shelf life and achieve different textures, tastes, consistencies, etc. “In general, to qualify, a company must encounter a technological uncertainty it wants to resolve. The program is about the acquisition of knowledge, and even going after a small amount of increased knowledge can qualify,” explains Louie.
 

Choosing the right insurance strategy

Insuring a food or beverage manufacturing business is every bit as complex as financing it. That’s partly because over the past 20 years, the food industry, like many others, has become increasingly globalized. “The industry is highly specialized and rapidly changing,” says Janell Nelson, director of sales at Sentry Insurance in Stevens Point, WI. “Food production equipment is highly technical and expensive and needs to be carefully evaluated to help ensure proper coverage limits are determined. Fast growth triggers employee changes, property value changes, workflow process alterations and safety challenges. These aspects have helped increase the need for stronger relationships between business owners and insurance providers.”

When scouting for the ideal insurance provider, Nelson says business owners should look for a company they can trust and one that specializes in food production markets. “In addition, they should look for a company with an A+ rating from A.M. Best, so they can be sure that, in the event of a large claim, the insurance company has the resources to pay.” Nelson also offers the following checklist:

  • Work with a trusted advisor that specializes in your industry.
  • Work with an insurance company that offers expert product knowledge and safety solutions for controlling claims in workers’ compensation, liability and property exposures.
  • Work with an insurance professional with experience and product knowledge who is willing to conduct thorough policy reviews with you on a regular basis.
  • Work with a financially strong insurance company.

Despite its importance, insurance is not something business owners typically want to spend a lot of time on. This puts the onus on the carrier. “It’s our job to provide coverage that will adequately protect the business assets and help manage claims,” says Nelson. “Strong communication between the business owner and insurance professional makes sure policy language aligns with the client’s business needs.”

But insurance should go beyond the traditional coverage against hazards, liability, recalls and damages. The key people in a company—the founder, top salesperson, technical and development manager and others also should be insured since the loss of any of them through illness, death or resignation could create havoc. 

“This is where ‘Key Person insurance’ comes into the picture,” says Mike Newell, financial security advisor at Freedom 55 Financial, based in Oakville, ON. “For example, if a business were to lose a senior sales executive, especially one that has long-term client relationships, there could be an adverse effect on revenues until a replacement could be found. Key Person insurance provides the business with operating capital in the interim.” 

Another important consideration is an up-to-date “Buy Sell” agreement funded by life insurance. If one of the owners passes away, this insurance, which is like a business will of sorts, instructs to whom and under what circumstances the business can be sold to ensure its survival. Otherwise, the business may fall into the hands of inexperienced surviving family members and/or end up on the auction block.
 

Partners in risk management

The right insurer also can be a great partner in risk management. For example, numerous employees at a large US bakery were mixing batter, filling baking pans and decorating gourmet cakes and pies in 12-hour shifts, six to seven days per week. When repetitive motion injury claims became an issue, the company contacted Liberty Mutual Insurance of Boston, MA for help. The insurer formed a cross-functional team that used Liberty Mutual’s ergonomics and scheduling tools to introduce shorter and better ways of working. The result was a 16 percent reduction in claims and a 75 percent improvement in lost time at the bakery. In one year, these and other improvements translated to $535,311 in savings.

Whether a food manufacturer is looking to grow or improve day-to-day operations, equipment leasing and insurance are both important aspects of keeping an operation solid and sustainable.
 

   

Too cold to burn? Think again.

Years ago, the National Fire Protection Association (NFPA) announced over 100 fires break out in refrigerated storage areas each year. Logic dictates fires shouldn’t happen in the cold, but they do, and they’re often difficult to put out because low temperatures can cause sprinkler systems to freeze up and stop operating normally.

Consequently, these systems must be installed properly to prevent the development of “ice plugs” in the tubing. In addition, insulated wall panels should have an Underwriters Laboratory flame-spread rating of less than 25 (the rate at which a flame could spread over the surface of a material compared to asbestos board). Sprinklers also must be strategically placed to provide the best fire-fighting performance.

Liberty Mutual and other insurance carriers have published case stories on fire prevention and other subjects specifically related to minimizing risks in the food manufacturing industry. They are good examples of why processors should choose financial and insurance partners that understand both the basics and the nuances of their specific businesses.

   

 

For more information:

Amy Vog, Equipment Leasing & Finance Association,
avogt@elfaonline.org, www.elfaonline.org

Chris Nay, GE Capital, Corporate Finance,
chris.nay@ge.com, www.gecapital.com

Michael Sherman, Huntington National Bank,
michael.sherman@huntington.comwww.huntington.com

David Reynolds, INAC Services Ltd.,
dreynolds@inacservices.com, www.inacservices.com

Todd Louie, The Sherman Group,
toddl@thesheldongroup.ca, www.thesheldongroup.ca

Andrew Williams, Sentry Insurance,
andrew.williams@sentry.com, www.sentry.com

Mike Newell, Freedom 55 Financial,
mike.newell@freedom55financial.comwww.freedom55financial.com

Christopher Goetcheus, Liberty Mutual,
christopher.goetcheus@libertymutual.comwww.libertymutual.com

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