Accounting for Financing New Offerings
The technology in our industry is changing fast. A walk through any industry trade show turns up products and vendors that didn’t exist 10 years ago. Services such as video monitoring, IP signal transmission, HVAC interconnectivity, wireless home automation, and radio and cellular primary communication provide opportunities for increased margin and RMR. Providing these services to customers introduces a new set of dynamics to your business.
Many customers see value in these services (and a more connected customer may be less likely to cancel) but may balk at the high initial cost of the installation, especially video systems. Many alarm companies and integrators are finding that effectively “leasing” the equipment can be extremely lucrative. Many also find out that succeeding at leasing requires a higher degree of financial sophistication and cash, and credit, management. Companies that have been substantially “debt free” find that upfront cost of equipment and labor to perform these subsidized installs puts a strain on their cash flow. They are also seeing their level of accounts receivable skyrocket as the incremental RMR from new installations increases by a factor of two to five times.
Shakespeare said, “Neither a borrower or lender be,” but he didn’t run a modern alarm or systems integration company. Now is a good time to assess your credit facilities. If your needs are less than $30,000, many industry distributors offer credit card-type financing often with no interest for 90 days. If you go this route, make certain you can pay the balance off every 90 days as interest rates can be fairly steep if you don’t. If your needs are less than $250,000 to $500,000 a local bank may be able to help. Call your local banker and get to know each other. Banks are in business to lend and their willingness to lend will increase as you develop a relationship with them.
If you need more than this amount, there are a few industry lenders that may be able to accommodate you. If you are going to obtain a significant credit facility, the bank will probably require some sort of financial reporting, but this is not necessarily a bad thing. Producing financial statements that detail performance and profitability, as opposed to tax returns that focus on income reduction and tax avoidance, should help you to better gauge your operations. Talk to your accountant and take the steps to improve your internal and external financial reporting and management.
Remember that if you are counting on future RMR or “lease” revenue to recover your installation costs and profits, you have effectively become a lender to your customers. Unless you are very confident about your credit evaluation skills you should be very conservative about offering leasing arrangements to customers. Third-party financing companies can be a good source of cash for financing installation costs. There are several third-party leasing companies that will provide financing to your customer on a nonrecourse-type lease. This allows you to get out of the financing business and get paid for your installation upfront. You can also charge for monitoring and other recurring revenue services. Not all leasing companies are alike so make sure whomever you use will treat your customer fairly.
There is no shame in asking your customer to sign a third-party lease to finance a $20,000 installation over five years. You are in the installation and monitoring business, not a finance company. Companies have used third-party leasing programs for years and most have seen their income increase as cash is available for installs that they used to turn down. I see a lot of security companies that spend an inordinate amount of time “chasing cash.”
Chances are you didn’t get into the security business to be a banker or bookkeeper. Focus on what you do best, installing, servicing and monitoring systems, and let the financial guys help you with the cash side.
Mitch Reitman is principal of Fort Worth, Texas-based S.I.C. Consulting Inc.
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