For
much of the last 150 years, the United States railroad industry
has been one of the world’s most attractive lending
marketplaces. Today, while some railroad operations benefit from
substantial access to capital, too many Class II and III
railroads are growth-limited by inadequate financing.
This urgent challenge must be faced with “can-do” spirit
and leadership, rather than the prevailing resignation that
handcuffs many owners and industry advisors when dealing with
the lending community’s negativity. We are committed to
providing the insights and tools to allow all North American
railroads – Class Is, IIs, and IIIs
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to break out of the historical limitations to a fuller access to
productive expansion capital.
ASSUME RESPONSIBILITY FOR THE RESULTS
Successful
financing initiatives begin by taking full responsibility for
the quality and clarity of your presentation. No business speaks
for itself, and even if railroads could, the language would be
incomprehensible. Any railroad owner, who wants results, rather
than the reasons why not, must be prepared to take on capital
access with a clear-headed commitment to the delivery of an
effective presentation of the ins and outs of your operation.
Comprehensive executive management includes financial
statement management. Most business owners consider statements a
mandated annoyance fortunately handled by staff and accountants.
Relating to financial statements this way, which is to say, as
either a tax-saving document or a minimally utilized management
tool, misses its primary importance to the future of the
business. This one document, more than any other element,
determines future access to capital for your operation.
Assess your financial statements for their effectiveness
in “marketing” your business to lenders and investors. More
important than their physical attractiveness is the thoroughness
of the content. Even “bad” news can generate confidence through
full disclosure of the problems, highlighting of the remedies,
and communicating a vision of the future.
UNDERSTAND YOUR FINANCIAL STATEMENTS
In order to make sure your financials best represent
your operation’s strength, vitality, and potential, learn the
meaning of every entry on your profit-and-loss and balance-sheet
statements. You can do it, with the help of your staff and
advisors, and you can direct changes to your statements. Simply
pick up your income statement and balance sheet and start asking
questions about each item you don’t understand. In spite of
accounting regulations that dictate their preparation, financial
statements still reflect the individual preparer’s point of
view, language, and style. Railroad owners themselves are in a
better position than anyone to insure the positive impact of
their operations’ financial statements.
ANTICIPATE LENDERS’ CONCERNS
Lenders lend to owners of the company, not to the
preparers of the financial statements. With an in-depth
understanding of your financials, you can be ready to answer
lenders’ questions intelligently and candidly. You can
anticipate lenders’ concerns and address them proactively in
your presentation.
Lenders begin their review of your operation with a
reading of your financial statements. This superficial review
usually determines their inclination to fund your operation.
They are quickly assessing your operation against a set of basic
financial statement ratio standards. Railroads do not stack up
well against these traditional standards, so it is important for
you to address the differences via the supplemental
documentation you include with your financial statements.
Weaknesses in your financial statements are usually
challenges you have already addressed in your operation, and
have overcome. They now actually represent built-in strengths.
However, financial statements, in addition to being a reflection
of current activity, represent a historical picture of your
operation. Prior losses and miscues will still generate
questions by a lender, so it is important that you anticipate
these questions. You can speak or write with confidence about
these situations. How you handled these challenges reflects well
on your management skills, and communicating openly will inform
the lender of the unique characteristics of your business.
PERSONAL CREDIT HISTORY MATTERS
Unless your railroad’s annual revenues are over $10
million, the owner’s personal credit history will be an
important part of the financing application. Ignoring or
resenting this basic fact of business life is one of the most
common shortcomings among small business owners in all
industries. Excellent personal credit alone will not secure
financing for your operation, but questionable credit will
certainly hamper your access to capital.
Real estate debacles, personal or family medical crises,
divorce, and business turndowns can all affect a reputable
person’s credit history. The problem is compounded if the loan
officer does not inquire about the reasons for the
less-than-perfect credit history or if the potential borrower is
not adept at explaining it. The conversation often goes like
this: The lender asks, “How is your personal credit?” The
proprietor answers, “As far as I know, it’s good.” Never proceed
with a financing initiative without having recently reviewed
your personal credit bureau report. Your answer to lender’s
queries should be given with either certainty about your
excellent credit or a well-documented explanation of any
glitches.
Personal credit bureau reports can include erroneous or
outdated information. Invest the time and effort to guide the
credit bureau through necessary corrections, and check on it
every six months. Include a copy of your correct credit bureau
report with your financing presentation. This will demonstrate
your respect for the lender, and will buffer against the
lender’s consideration of an inaccurate report from another
bureau.
WHY THIS STRATEGIC APPROACH TO FINANCING?
Access to capital may be the fundamental element of
business success and healthy expansion. It should be considered
and forwarded in much the same way as a well-conceived
maintenance-of-way program. Planning for future transactions
includes the structuring of today’s financing as a foundation
for growth, rather than as a restriction on future
opportunities. The lender you are working with today may or may
not be appropriate for next year’s plans. A
one-transaction-at-a-time approach to borrowing has boxed in
many railroad owners, who find themselves restricted by bankers
whose visions do not extend past the payoffs of their current
loans.
Our experience has shown that business people meeting
the challenges of managing their daily operations have limited
focus available for the funding component of their expansion
plans. Financing is typically arranged only after a transaction
agreement has already been consummated. Under the time pressures of a waiting
transaction, business people tend to focus on the money and miss
the finer negotiating points with their lender. We recommend beginning the financing process with time to spare before you shop
for equipment, line acquisitions, or new projects. Many bids in
the railroad industry are awarded to the party with cash or
financing already secured. Access to capital, established prior
to the immediacy of transaction pressures, allows management to
contemplate, plan, bid, and negotiate with more certainty and
more power.
INTENDED RESULTS OF LONG-RANGE CAPITAL ACCESS PLAN
The goal of a capital access plan is to move relations
with lenders beyond the basic day-to-day funding
needs. Class II and Class III railroads, in particular, usually access only enough capital to
support marginal revenue growth.
These railroads can be significantly more profitable
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to the entire country’s benefit. With more capital, the
railroads can develop new shipping solutions, win back freight
that has migrated to less efficient modes, increase the
productive utilization of technology, and own more of their own
operations.
Railroads are unique enterprises. Every aspect of this
uniqueness can be presented as a positive facet of your
business’s vitality. We will continue to educate railroad owners
to more effectively present their individual operations. Each
operation needs to have its own special illumination that goes
beyond traditional financial statement analysis. As each
railroad, from the smallest switch operation to the largest
Class I, accesses more capital, it will be better positioned to
expand its service and its role in our continent’s
transportation system.
