This recession has been particularly hard on finance companies. Customers have stopped buying equipment, defaults are rising, and the banks are suddenly very nervous about providing funding.
But you won’t hear a complaint from Allan English, founder and chief executive of listed finance company SilverChef. The company specialises in financing equipment for companies in the hospitality sector and has more than 7000 restaurants, cafes and fast-food outlets on its books.
But rather than providing traditional finance, SilverChef uses a “rent, try, buy” model that allows SME hospitality businesses to rent equipment for a minimum of 12 months, with an option to buy the equipment and receive a rebate for 75% of the rent they have paid.
It’s an attractive model at the best of times, but in a recession it has become particularly appealing. SilverChef’s revenue increased 17% in the six months to 31 December to $16.3 million, with profit up 15% to $1.2 million. Profit for the full 2008-09 year is expected to be $4 million to $4.2 million.
“We are getting way over our budget,” English says.
“I like to think it’s because we are clever and we’ve got good marketing and all that stuff, but the reality is that the banks and finance companies have pulled out of the small business market.”
Of course, financing of any sort can be risky in this environment. But English says despite the recession and its obvious impact on the hospitality sector, SilverChef’s customers appear to be holding up well. Defaults on payments (which are taken weekly out of customers’ bank accounts via direct debit) have largely remained below the company’s benchmark of 2.5 out of 100.
“The direct debit default rate is a lead indicator to tell us when things are getting smelly,” English says. “At the higher end, the white table cloth restaurants are finding it tougher. But in the fast food sector and the café sector, we are not seeing it flow through to our numbers yet.”
That said, SilverChef manages its risk very carefully. Customers are required to pay a 13 week security bond for damage or default, and the company requires director guarantees from all customers. English says the time it takes for SilverChef to get its cash back (that is, recover the wholesale price of the equipment) is about seven months.
As a last resort, SilverChef can repossess the equipment and sell it through its second-hand division. But English says he is prepared to listen to any struggling customer.
“We do listen to the stories, and if there is a reasonable case we will work with the client. We don’t want the bloody equipment back.”
English says that despite banks’ attitudes towards equipment financing, SilverChef’s lenders remain supportive of the company and its growth plans. But he hastens to add that SilverChef could fund its activities out of its cashflow of $25 million, although that would involve “putting the handbrake” on growth.
English had the idea for SilverChef during a trip to the United States, when he says that the home delivery pizza market was booming. He returned home and together with a friend excitedly secured the agency for the conveyor oven, the pizza oven technology at the heart of a home delivery pizza store.
While there were only five such stores in Australia at the time, English was convinced about the market’s potential. He and his partner remortgaged their homes and placed an order for the ovens.
Three months later the ovens arrived and they set about selling them to pizza operators. It was a disaster. While the benefits were clear, pizza shops couldn’t afford to switch from their $6000 oven to a $27,500 model. The only solution was to use a rent-try-buy model to demonstrate the ovens, and hopefully spark future sales.
The model worked. For the next 10 years, English continued to build the rental business while working mainly in the equipment sales area in joint ventures with major manufacturers. In 1995, he bought out his partner in the rental business for “a steal” and set about growing the business.
But there was a big problem. “The faster I grew, the more capital I needed,” English says. He raised money himself through unsecured notes, and approached venture capital and private equity players for funding, only to find these were very expensive options.
In the end there was one choice left – float the business on the Australian Securities Exchange. The company hit the boards in 2005 at $1.50 a share. By early 2007 the shares had hit $2, but the market carnage has seen them fall to around $1.
While English says he never wanted to list, the process has strengthened the business, particularly in the areas of risk management and corporate governance.
“In the early stages of going through the listing process I was quite fearful. It’s quite an arduous process, but I don’t have an ounce of regret.
“People think abut corporate governance as being a pain in the arse, and yes it is, but there are some really good structures that enhance the business.”
While many business owners say competition is their biggest challenge, a lack of rivals has been one of English’s problems. “It was a fear of the unknown. We had nothing to say whether it would work. It’s not like we could look at another competitor.”
In order to diversify the business away from the hospitality sector (which is seen as risky by many lenders) SilverChef launched a new business called GoGetta last year. It provides funding for a wider range of equipment, including gym equipment, construction gear, equipment for butchers and bakers, point-of-sale, and sound and lighting equipment.
Revenue from the GoGetta division accounted for 6% of total revenue in the December half, although this is expected to grow sharply over the next 12 months – particularly if banks and traditional financiers stay out of the market.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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