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Providence Financial









MONTHLY NEWSLETTER:  OCTOBER 2004 ISSUE

DONíT PAY FOR A DEAD HORSE
BY BRENT VAN ALFEN, PROVIDENCE FINANCIAL CO, INC.


Once upon a time, a man bought a horse to pull his plow. He got a loan from the friendly local bank to pay for the horse because the seller wanted cash for this horse. The bank would take payments over the next ten years at a fair interest rate. The buyer thought this was a deal he could not pass up because the payments were so low. Unfortunately, the horse died two years after the man bought him. Now he must buy another horse to plow his field, but he still had eight years worth of payments left on the dead horse! Now he would be forced to make payments on a dead horse and a new horse. He was not a happy man.

I see this same mistake being made often in facilities financing. It is very tempting and not too difficult to add the cost of furniture, fixtures, and equipment into the long-term loan intended for fixed assets. The long-term effect will be the same as with the farmer--that is, the asset wears out long before it is paid for. It is axiomatic in finance that the term of the financing should be matched as closely as possible to the useful life of the asset it is intended to finance. There are a variety of ways to finance assets with short to intermediate term lives. Of course, there are the banks that will offer the best interest rates, but they will also want you to make a down payment of around twenty percent or more.

Leasing companies will offer the best terms, i.e. no down payment, but their rates will be somewhat higher. The challenge will be to find a bank or a leasing company that knows how to analyze a non-profit companyís financials. Further, both banks and leasing companies have an annoying habit of asking for personal guarantees of the principals. There are only rare circumstances, if any, where it makes any sense, whatsoever, for founders or board members to personally guarantee a financial obligation for a non-profit entity.

The solution to this dilemma is to find banks and leasing companies that have experience in dealing with non-profits. They are out there but not always easy to find. It is worth it, however, to find them and finance short to intermediate term assets correctly.

Brent Van Alfen, President
Providence Financial Co., Inc. 801-299-8555