Rebounding with a nonbank loan

Nation's Business, April, 1997 by Roberta Reynes

Here's how one company with financial troubles got back on the road to success with the help of a non-bank lender.

Tom Mattox lived through one of an entrepreneur's worst nightmares when the market for his company's products evaporated.

Retreading Equipment, Inc., in Charlotte, N.C., had been founded by Mattox's father as a manufacturer of machinery to retread bias-ply tires. But by the early 1980s, radial-ply tires had largely replaced bias-ply tires, and the retreading (or "recapping") process didn't work on radials. Also, recapped tires became less attractive to consumers as prices for new tires declined.

The equipment manufacturer's sales plummeted nearly 40 percent. Its dealers began filing for bankruptcy.

Even worse, the company had made financial decisions that came back to haunt it. It had offered dealers contracts to pay for their equipment purchases over time, then traded those contracts to banks in exchange for 90 percent of the face value of each contract, payable immediately. But Retreading had guaranteed the notes, so as dealers defaulted, their unpaid loan balances landed in Tom Mattox's lap.

Cash flow was squeezed down to a dribble. The company took out bank loans just to fund operations. Then, in the mid-1980s the design of radials changed, making them easier to recap. The company adapted its equipment to retread the new, higher-priced specialty tires, such as those for four-wheel-drive vehicles. As a result, sales rebounded about 20 percent.

Despite the improvement, the company struggled unsuccessfully into the 1990s to bring down its loan balances. "As we would pay loans down, more dealers would go bankrupt, sending our balances back up again," recalls Denis L. Hayes, a CPA and certified managerial accountant whom Mattox hired as controller in 1990.

Assets Frozen

The company was in a serious bind. It fell behind on taxes. By mid-1993, the financial institutions to which it owed money--three banks and a commercial finance company--held all the company's assets, everything from accounts receivable to equipment, as collateral on the loans.

Because all of Retreading's assets were tied up, the company found it next to impossible to persuade other lenders to accept the assets as guarantees for additional loans.

Further, nothing could be sold to raise cash.

The company was just beginning to export. But the freezing of assets, combined with an extremely tight cash flow, prevented it from seizing the opportunities that Mattox believed were there.

Hayes went to the financial institutions to ask them to release some of the assets and to provide longer payment terms. They refused.

Next, he worked with a consultant who said he had good contacts with various lenders. But the consultant wasn't able to help, either.

In September 1993, the company turned to GE Capital Small Business Finance Corp., a nonbank lender that is a subsidiary of General Electric Co. with 40 offices nationwide. Nonbank lenders generally team up with the U.S. Small Business Administration to provide long-term SBA-guaranteed loans at rates comparable to those of banks.

But GE Capital SBFC, which has about 2,350 SBA-guaranteed and other loans on its books, turned down Retreading, too although it left the door open to further discussions.

Retreading had been profitable for two years; GE Capital wanted to see a third. It also wanted the last of the dealer contracts that Retreading had traded to banks to be fulfilled. If these conditions could be met, GE said, it could do business with Retreading.

Any potential time-consuming snafu was now a cause for worry to Mattox and Hayes. If the company didn't get financing soon, it would probably go bankrupt.

"Up until that point, no financial institution had called its note or demanded payment in full," says Hayes. But he knew the banks could. "Some of these notes were old and had matured. The banks had just continued the note without enforcing collection. If they did that, it would force us into bankruptcy."

A Note Of Encouragement

By late December 1994, Retreading had met GE Capital's conditions. The company submitted an application requesting $750,000, along with the required loan documents. GE came back with questions or calls for more information three or four times. Weeks of waiting turned into months.

At one point, GE Capital SBFC loan officer Everett Walker called Hayes to say that the SBA had just imposed a lending cap of $500,000. But Retreading urgently needed the full $750,000. GE Capital eventually offered a nonguaranteed loan for $250,000 to make up the difference, but this caused further delay.

Through all this, there was a steady stream of communication between Retreading and GE Capital. "We worked with them on an almost daily basis to get the project completed," says Kale B. Gaston, a GE Capital SBFC vice president and manager of the corporation's Southeast region.

In mid-June 1995, GE Capital approved Retreading's $750,000, 15-year loan package. But Retreading's ordeal wasn't over. A routine title search turned up the disquieting fact that one of Retreading's buildings stood partly on a small piece of land that the company did not own.