Leasing Broadcast Equipment

Many people think the word leasing means lack of ownership, high interest rates or something akin to a rental with no end of term purchase option. However capital leases offer a fixed end of term purchase and a high percentage of capital leases offer a $1.00 buy out. Other types of capital leases offer a fixed purchase of 10% , 20% or 30% of the original purchase price however in those cases reputable lessors amortize only 90%, 80% or 70% of the cost of the equipment resulting in lower payments. not unlike a stand term loan with a "cap reduction" (down payment). There are other types of leases, of course. True Leases are also known as Fair Market Value Leases. They often afford lower payments and offer the lessee options at the end of term including; return the equipment, extend the lease, or purchase the equipment for its, then, fair market value. Operating Leases are a special type of lease in which the lessor invests sufficient equipment in the equipment to meet a "90% test" that qualifies the lease in the eyes of the Internal Revenue Service and the accounting standards board. In addition other criteria must be met including non-transfer of ownership, and the absence of a "bargain purchase option". Broadcasters should explore and discuss various types of lease options to insure that the type of lease chosen meets the financial and accounting objectives of the station.

Match Technology Financing To The Utility of The Asset

While it is sometimes tempting to fold all costs into a five or seven year financing, in order to achieve a budget or cash flow objective, it is important to reflect on the various nature of different costs inherent in a broadcast systems integration project. For instance it may make sense to finance an HD transmitter for 10 years, a console for 7 years, station automation technology for 5 years and software for 3 years. You may also want to include all systems integration costs such as delivery, labor, installation, warranty and services. But try to avoid financing costs or expenses that will be repeated during the financing period. Match your financing to the utility of your equipment, technology and systems.

Specialized Financing For Radio Station Owners & Broadcasters

Many radio station owners of groups or singles stations tell me that their bank or other financing source just doesn't understand the broadcasting business. Radio stations are often highly leveraged and revenues are generated through ad sales. Advertisers come and go and are dependent on local or regional economies. Certain ad spots are geared to seasonal promotions while others ebb and flow with political campaigns. Small market stations often struggle to compete with larger corporate broadcasters who dominate the airwaves. When broadcasters and station owners choose to invest in upgrading their facilities replacing broadcast technologies or expanding their group of stations it is often critical to have financing that fits the needs of the broadcaster (vs. the needs of the lender). Finding lenders who specialize in broadcast technology and radio station financials is key to achieving budget and cash flow solutions that fit the dynamics of the respective broadcaster's business. Sometimes smaller local banks "get it" and can become a good "friend" to radio. More often than not the radio station owner has few comparative choices for financing. When considering equipment or technology financing for your station seek out proposals from two or more competing sources that have an understanding of the radio station business and who know the technology. Negotiating good financing with a reputable lender will pay "dividends" in terms of limiting interest earnings and, perhaps more importantly, getting the right transaction structure that meets your station's specific needs and objectives.

An Operating Budget Solution to a Capital Budget Problem

Financing is often called an operating budget solution to a capital budget problem because it allows for the payment of equipment, technology or systems out of the monthly cash flow of the business, broadcaster, or media related firm. A capital budget offers a point in time plan to fund a specific purchase such as a transmitter, a camera, a switcher, or some other type of broadcast, lighting, sound or media technology. An Operating budget is more fluid and considers the ebb and flow of income the way it occurs naturally in a business, studio, station, production facility, stadium, concert hall, etc. Capital budgets are effective for planning regular (especially current or next year) expenditures such as the systematic costs that come with people, salaries, benefits, the purchase of bulk goods, the acquisition of another enterprise, the steady need for certain supplies or materials used in the business. However Operating budgets are effective for planning and allocating funding and payments for technology that produces income, creates savings or otherwise can be amortized over an extended period of time beyond the one year Capital budgeting cycle. Many firms now choose to allocate capital budget funding for current year or next year costs while utilizing the Operating Budget to allocate funding for equipment, systems and technology that has a multiple year useful life or that depreciates over an extended period of time. Larger companies with multiple stations often control the capital budget at corporate headquarters while allocating an annual Operating Budget to the local station General Manager, or Chief Engineer. Consider Operating Budgets as a means to "spread the cost of technology to match the timing of revenues and cash flow.

Matching Costs To Savings and Revenue Generated by Technology

A $50,0000 transmitter can be acquired for a monthly payment approximating $980 a month on a 60 month financing arrangement. Dividing that payment by 30 days results in a daily cost of approximately $33 a day. If a new transmitter offers energy efficiency that saves $33 a day then the transmitter pays for itself. If one advertiser places one or two more ad spots a day the transmitter pays for itself. If the transmitter expands the reach of the station so that more listeners and more advertisers join the station the transmitter pays for itself. Radio transmitters, be they analog or digital, whether 1KW or 50KW, have a "useful life" of somewhere between 10 and 25 years. Why not match the utility of the equipment to the timing of savings or revenues generated? This simple method allows the equipment to pay for itself by matching the equipment expense to the natural timing of cash from savings or from ad revenue.

Consider The Complications and True Cost of Bank Loans

I am an advocate for small businesses, such as broadcasters and media firms, to establish and build a good relationship with your local bank. Typically that means getting to know a senior officer at the headquarters or local branch, and more importantly, helping them get to know you and the nuances of your particular business. Sometimes this is difficult. Large banks tend to rotate officers. Nonetheless it pays to have a relationship with a local banker for depository accounts such as business checking and savings and for your personal accounts as well. The more they know you, and trust you, the better positioned they are to help you with working capital, operating lines of credit and business acquisition lending.

An important consideration when seeking bank financing for equipment is "what is the real cost" of the borrowing? One advantage that bank loans may have is that they are often "simple interest" loans which means you are only charged interest for the time you have use of the money. This is important if you plan on borrowing but expect to pay-off "early". For instance you might take out a loan with payments based on 36 months, but you expect to pay it off in the first year. A bank Simple Interest loan may be an attractive solution. However, it is important to keep in mind that bank loans often charge loan administration costs that inflate the actual financing rate. A typical bank loan might offer an interest rate of Prime + 1% or 2% or 3% (currently 8.5%, 9.5% or 10.5%) for an average small to medium sized business. Remember that if these rates are "floating" you bear an interest rate risk if the expectation is that market rates will rise over the term of your loan. Banks often charge an annual fee to administer the loan every year that the loan is active. This fee may be 1% or 2% or 3% of the loan. Don't forget to factor that in to your interest rate. It could change your "Prime+0%" loan into a Prime+3% very quickly. Banks also want you to keep money in your account and they probably are not going to pay you the maximum return you could earn elsewhere. These required deposits are called "compensating balances". The bank probably won't ask you to pledge an amount equal to the loan but remember that if you fall delinquent on your loan the bank could attach your deposits. Another factor that banks use to control or mitigate their lending risk is to write loan "covenants" into the language of your loan documents. Loan covenants are usually restrictive and written to the benefit of the bank and often create limitations on future borrowing, such as you cannot borrow from anyone unless you obtain the bank's approval. They also often include "milestones" whereby if your business doesn't achieve certain levels of financial performance the bank can "call" the loan (meaning you must repay it immediately. I recommend that when considering a bank loan for equipment, technology or systems integration projects you consider the cost and the impact on your business of the bank loan, then compare and weigh a non bank financing. You may be surprised to find that often you can achieve lower financing rates with an bank owned financing or leasing company that specializes in equipment finance but without the restrictions, limitations or involvement with your business.

A Cash Purchase is Self Financing

We often think of "financing" or "leasing" as something the bank, equipment finance company, or leasing company provides. A cash purchase somehow does not feel like "financing" and yet that is exactly what it is. I refer to cash buying as "self financing" because one must borrow from oneself and in the process trade the utility or earning potential of the cash in favor of an investment in equipment (which may bear its own return). When most people think of taking money from their own bank account to make a purchase of some capital goods or equipment they view the loss of investment opportunity (on the capital) as equal to the savings or investment rate that they would have received had they kept their capital in the bank. Yet the true opportunity-cost of one's own money is not the loss of the investment return you receive on the static use of money in the bank but rather the loss of the return that you would average on your capital when reinvested in a business. The Return On Capital for many broadcasters and media related companies typicially is targeted to return from 12% to 20%. In many cases if business has the opportunity to borrow with financing at rates in the 7% or 8% range it may be a better alternative to use outside funding and use ones own capital to re-invest in business growth, people, acquisitions or operations.