April 20th, 2023
Challenges Facing Small Business Owners Seeking to Vertically Integrate
With the supply chain interruptions that we have all experienced over the past two years, many of the smaller window shops and glass shops are now seeking to vertically integrate. Tired of long lead times, quality issues and cost increases associated with outsourcing windows and even insulating glass, these smaller businesses are looking into taking matters into their own hands by making their own products and materials. However, with this desire to vertically integrate comes two major hurdles: lead times on equipment and equipment financing. Here are some possible solutions.
The unusually strong demand we have seen over the past two years, coupled with shortages of labor, have led to an unusually strong demand for equipment. Equipment manufacturers are now backed up with orders and lead times now range from six to 18 months or more. A possible short-term solution is to consider buying pre-owned equipment instead of or in addition to your new equipment while you wait for new equipment to arrive. Indeed, many fabricators are seeking pre-owned equipment as a short-term solution.
Pre-owned equipment offers quite a few advantages. First of all, lead times are much shorter, ranging from zero to 90 days. As a pre-owned equipment broker, I am in many cases seeing sellers list their existing equipment for up to 90 days before their new equipment arrives, especially if they do not have the floor space to store the older equipment when the new machines show up. In this way they can usually time the delivery of their new equipment to coincide with the pickup of their existing machinery to avoid unnecessary accumulation of machines on the plant floor.
The process of listing existing equipment ahead of time also helps the selling process as potential buyers can visit to see how well the equipment is operating or see up-to-date videos, which can prove sound operation of the used machinery that buyers are about to purchase. The second major advantage of pre-owned equipment is obviously one of lower cost, and this helps fabricators to lower the cost of entry into new business endeavors. In many cases it really pays to walk before you run when it comes to investing in new ventures or even expansion of existing business.
The second major obstacle is financing. Small businesses are having more difficulty in obtaining commercial loans from their regional banks. You see, regional banks are normally a critical source of funding for commercial borrowers because national banks are less likely to provide funds to the average commercial loan agency. But with the recent failures of regional lenders Silicon Valley Bank and Signature Bank, smaller lenders are now tightening up the lending criteria for commercial loans. See Borrowing for Small Businesses Further Constrained.
A possible solution here is to seek out companies that specialize in equipment financing while leaving your line of credit open at your local bank in case of emergencies. According to Michelle Sherman, of Apex Capital, financing can be obtained on 100% of your equipment costs, including electrical, freight, installation, training and software, whereas your regional bank may only finance up to 80% and it may take weeks to get approval. According to Sherman, most approvals at Apex take 24 hours or less.
Another option is to seek out a funding company that uses private equity as the source of funds. I talked with Kevin Anderson, who introduced me to Centra Funding, which is one such company that can provide fast funding with a one-page application on new or used equipment. Centra was formed and owned by John Boettigheimer, a significant owner, and its president/general manager. Centra Funding LLC is a wholly-owned subsidiary of CV Holdings Inc., a diversified holding company with investments in a number of specialty finance verticals. Centra is also known as “four-hour funding” because they can get you from the process of loan application to the funding of your vendors in four business hours or less!
So, there you have it. Small businesses can improve their overall profitability and speed to the market through the process of vertical integration. This involves the acquisition of equipment and a degree of financial leveraging but can have huge payoffs down the road. Considering pre-owned equipment and seeking out flexible finance partners can make all the difference. It pays to be smart and walk before you run!