The Art of the Double Play

How a CFO runs the finances of two companies at once, why he won't agree to a prepayment penalty past the first two years of a capital-financing deal, and what he has against Starbucks.

You haven’t had any problems renewing the credit lines last year and this year?

No. Our financials are strong. Estenson has about $2 million in Nevada State Bank, our primary account; $1 million in a payroll account at U.S. Bank; and $750,000 in a money-market account at Citibank. So it’s a $90 million company with almost $4 million sitting in the bank.

The problem is, that makes us a target. If one of our trucks hurts or, God forbid, kills somebody, the first thing the lawyers will do is look at your balance sheet to see how much cash you’ve got. Then they know what they can go after. So our lawyers agree that we shouldn’t keep any more cash than absolutely necessary.

But the owners want the money liquid for growth and opportunities. So a while back, I told them they need to take money out of the company and start up an investment company; put the money in CDs or money markets to keep it liquid, and if we need a capital call you can put it back in. So in July, I issued them checks through accounts payable for $1 million as a dividend distribution, in proportion to their ownership shares.

Before they only took out distributions for taxes and to pay off a grant. Now that they’re taking regular distributions out, they’re going to have to do personal guarantees for the financing on our tractors and trailers, and they understand that.

What kind of deals are you getting on that financing?

I will only agree to a prepayment penalty of 2% the first year, 1% the second year, and 0% for any future years. I do that because it’s highly unlikely one of our customers is going to want out during the first two years of a contract. After that, [the client] may just decide they don’t want to do it anymore for whatever reason.

But by then I have no prepayment penalties, so now, with the amortization schedule I have with the customer, I’m right-side up on the equipment. If they buy out the equipment, by the time I pay off the note, I have extra cash left over.

And then we look at the insurance clauses and default clauses. Every [financing firm] has default clauses, but they never have notice clauses. So I told [the financing companies], I want a written notice and a 30-day option to cure. Because you know what, the Post Office really does lose mail. The AP clerk really does make a mistake and the invoice gets paper-clipped to something else and something doesn’t get paid. If you want to do business with us, we have to come to an agreement on [this].

 

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