Financing Fun: Loans And Leases Are Readily Available To Operators, If Needed

NEW BRUNSWICK, NJ – Ready to count your blessings? Before anybody can say “what blessings?”, allow me to explain. We all know many sectors of the amusements industry have their woes these days. But it’s also true that operators enjoy some pretty nice silver linings – particularly in comparison to most other industries in today’s economy. One of our greatest advantages is (relatively) easy and plentiful access to capital.

In fact, money is so readily available to street operators and entertainment center owners, that many of us take it for granted. But if you look beyond the narrow world of coin-op and leisure, the picture is very different. From the stock market to hi-tech, from communications to services and retail…capital for business expansion or new business startups has pretty much dried up everywhere.

A recent item in the Los Angeles Times illustrates my point. Award-winning financial columnist James Flannigan wrote about Data Systems Worldwide, a successful local provider of business information technology. Despite their excellent track record and current solid standing, this company can’t seem to qualify for capital to expand. “They’re not alone, said Flannigan, for many businesses, no matter how well they are doing, coming up with the cash to grow can be extraordinarily difficult, especially in the current economic climate.”

Why doesn’t the amusements industry face the same problem? In a nutshell, it’s because we have unique strengths that make us attractive to certain lenders, and also because we have access to some unusual sources of capital. Let me explain.

One situation that we often see is a well-collateralized, existing single-anchor leisure facility (such as a bowling center, skating rink, or other site that has a long running successful track record) that wants to renovate or expand, in order to broaden its customer base and keep its attractions fresh. Usually, the facility enjoys good cash flow and considerable equity. Fortunately, the new attractions and revenue generating programs required to expand their demographic appeal are often relatively inexpensive, particularly in comparison to likely ROI. Given this business owner’s high equity, he can easily borrow money from the bank at the best rates on the market.

Another typical situation that we encounter is very different. Let’s say an entrepreneur has an idea, a plan, and a team in place to create a brand-new leisure facility. All he needs is the money. If banks and venture capital firms say no, where else can he go? Plenty of places, actually. Now is an excellent time to go out and look for private investors because there are so many of them. Due to today’s economy, many well-to-do citizens have pulled out of the stock market. They also are unsatisfied with three percent interest from “safe” investment targets such as bonds or certificates of deposit. Seeking, say, a ten percent ROI over ten years with reasonable risk, these investors view our industry as an attractive opportunity – especially when they are presented with a well-planned project that includes positive cash flow, property appreciation, and multiple exit strategies. In such cases, all that is needed is an intelligent leader with a charismatic personality and the ability to get people excited with their ‘dream.’

This willingness to put money into a new project makes investors very different from traditional financial institutions. Banks are largely uninterested in startups today, even if you are fully collateralized. As for the venture capital market, it is the last place I would turn for financing. Funding from the U.S. Small Business Administration is also less available than in times past.

Turning back to Data Systems Worldwide, the company that James Flannigan wrote about: why are they facing such a tough financial market? Perhaps because they are a service provider or a high-tech company. They may have great cash flow, but without major assets that can serve as collateral, cash flow alone not good enough for banks and other traditional lenders. That’s because cash flows are highly unpredictable in today’s market. Wars and rumors of wars, sniper attacks, and even bad weather causes consumers to stay home and hoard their money.

The vulnerability of cash flow also applies to our industry, of course, and perhaps more than most. For example, a President’s Day weekend snowstorm in the Northeast reportedly cost the Chuck E. Cheese chain a million dollars. (Note that here I don’t wish to tell you what it cost my operation). When unpredictable events occur, entertainment businesses that sell entertainment ‘time,’ simply cannot make up the lost income.

This points up yet another advantage to working with private investors or investor groups: they tend to be more relaxed and understanding when cash flows fall off, due to uncontrollable outside events (weather, war, whatever). Having to comply with 16 or more ‘covenant ratios’ established by your banker is a full time job in itself. By the same token, today’s market climate almost makes it easier to start a mid-sized or large entertainment center project, as opposed to a small startup. This factor also points you in the direction of investor groups as the best source of capital.

I admit that putting together an expansion budget for $250,000 or a brand-new $2 million project is not pocket change. But it’s not a huge amount when divided up into $25,000-$50,000 investor partners. What is required is a dynamic “salesman” who can showcase the idea to potential investors. Some entrepreneurs who seek investor capital are good at it, some aren’t. (By the way, the latter group would actually be wise to hire a spokesman to make the presentations for them. Sometimes, ego gets in the way -- even smart people don’t always see their own shortcomings.)

Here’s the million-dollar question. How do capital-hungry amusement professionals find – or put together -- a pool of potential investors? For expansions of a million and less, or for new centers in the one to three million range, there is no one set method…but it can be done. One public school athletics coach of my acquaintance went to all the parents in his community with an idea for a fun center and found five interested parties who together put up the required equity funding. Through their banking connections they were able to obtain the necessary financing. Creative attorneys stage social events so their important clients could meet each other and generate joint ventures and new projects (the lawyers then get to write up the contracts and file the incorporation papers, etc.). I even know ministers who have approached their congregations with the idea for youth centers and “passed the plate.”

Keep in mind that all that I have said above, applies to fun centers seeking funding under three million dollars. When investors are asked to put money into site-based projects that cost above the three million level, the risks increase. Meanwhile the likely returns diminish. And the number or quality of investors that must be found to support such projects, can becomes problematic. You either have to tap into a tiny handful of the ultra-rich, or you have to assemble 50 smaller-sized investors. Either way it’s a daunting task.

Established street operators who simply seek financing for purchasing a normal amount of new equipment, will find many sources of capital and few obstacles today. Our industry is fortunate to have a number of lending and leasing companies such as Firestone, First Lease, Vend Lease, Alliance Capital, and others that specialize in working with coin-op amusement professionals. These lenders know that today’s surviving operators are professionals who usually buy carefully. Experienced niche lenders also know that carefully planned new purchases in our industry should generate immediate cash flow. The loans are fully collateralized or fully guaranteed. Where else are the lenders going to find such quick, reliable repayment? Especially when the lenders acquire the money for two percent, and re-lend to the operator for twelve percent!

The question is whether street operators are better advised to borrow, or just pay cash. If they pay cash, they may be able to become debt-free. This status is not only desirable but quite possible for many operators. If they buy new equipment, they pay out of cash flow. Industry creditors – especially certain distributors -- become even more anxious to make loans under these circumstances. That can be a tool for greater leverage on the part of the operator if he does decide to finance his next purchase.

The temptation, however, is for the operator to simply pay off the last debts on his ledger and run his company as he did 20 years ago – cash and carry. Some lenders claim buying new equipment with cash is not the best way to go, but I disagree. There is no safe investment with high returns, so what else does a good businessman do with capital reserves? If you want to expand your route business by purchasing new games, I think it makes more sense to pay for them with cash, rather than financing new equipment buys and putting your cash into the stock market or bonds.

Of course, some of the industry’s financial institutions will also help you finance the purchase of another route, which is a whole different story. In that case, financing may be not only wise but necessary.

To sum up, I would say today’s operators enjoy the best of both worlds. Many of us don’t have to depend on financing, but some of us do…and for those who have done their homework, it’s there -- at reasonable prices, too. Remember that the next time somebody tells you there’s no good news in this industry

Vending Times February 2003