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A Monthly Briefing for Optical Lab Owners and Managers

- June 2017 -

Dollars & Sense

Make What You Say Pay

Lab Notes

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Dollars & Sense

Tracking the Elusive Business Loan

By Phillip M. Perry

Here’s good news if your laboratory needs money for a new piece of equipment and/or expansion: Financial institutions are more eager to lend than at any time since the Great Recession.

“As more banks have worked their way back to profitability in recent years, there has been a loosening of the purse strings,” says John McQuaig, managing partner of McQuaig & Welk, the Wenatchee, Wash., based management consulting firm (mcqw.com). 

The trend is likely to continue, for several reasons. One is the anticipated loosening of federal regulations that have restricted bank lending practices. A more immediate force, though, is the higher cost of money.

“Rising interest rates improve banks’ margins, and if they become more profitable they can potentially lend more,” says Linda Keith, an Olympia, Wash.,-based CPA with a niche practice in lender credit training (lindakeithcpa.com).

Of course, higher rates are a two-edged sword. They also increase the costs of money for business customers, and the higher payments make it harder to qualify for loans.

“Most small businesses who obtained variable interest rate loans in 2016 or earlier will see an increase in their monthly payments,” says Denise Beeson, a small business consultant based in Santa Rosa, Calif. (denisebeeson.com). “For some borrowers, this increase may not be substantial. However, we anticipate further rate increases in 2017.”

Even so, the nations’ historically low interest rate environment means there is still some room for rates to grow without having a huge impact.

Real Estate

An improving commercial real estate market is also driving more business lending in most regions of the country. That’s good news for anyone using property as collateral. “Many banks are now willing to lend up to 80 percent of property value, higher than the 65 to 70 percent in the years following the Great Recession,” says McQuaig.

That happy condition is not universal, however. In some areas the real estate market has overheated, sparking fears of overvaluations. As a result, some banks are reducing the amounts they will loan on appraised value.

“Banks need confidence in the local market and in real estate appraisals to support loans,” says Keith. “They will ask themselves, ‘Do valuations really reflect what a seller can get for the property?’”

Despite the improving lending environment, one thing hasn’t changed since the dark days of 2008: A heightened banking interest in customer cash flow. Indeed, while collateral can be important for the lending machine, it is no longer a driving gear.

“Banks are looking for quality performing loans,” says Keith. “They want to see, first, that the business borrower can repay a loan using cash flow generated from operations. Second, they want to see good liquidity, so if the operations don’t come off as planned the borrower has enough money to pay as agreed.”

As a third line of defense, adds Keith, banks look for a personal guarantee: Does the lab owner have enough funds to backstop the business? And finally, what’s the lab’s current debt load? Does the lab have room to borrow more?

It all comes together to produce a loan decision, “With those various potential sources of funds,” says Keith, “the bank hopes it will not have to collect on the collateral.”

Of the four indicators mentioned above, the most critical is the first: debt coverage (the ratio of net cash flow to annual principal and interest payments). Banks expect business borrowers to generate 120 to 130 percent of their total loan payments in net cash flow.

Here’s an example: Suppose your annual payments for principal and interest come to $100,000. Then you need to generate at least $120,000 in cash flow after all other expenses are paid. And that 120 percent figure is a bare minimum today, says Keith. Banks are more comfortable with 125 percent. For reference, back in the Great Recession they were requiring a 135 percent.

Small Is Good

“Finding the right bank for your deal is important,” says Brad Farris, principal at Chicago-based Anchor Advisors (anchoradvisors.com). “A big megabank offers complex and large financing, and the decision to lend is all about the numbers. Your local community bank, on the other hand, provides leasing and lines of credit and SBA real estate loans, and the decision to lend often depends on your relationship with a human being.”

That personal touch can be critical. “You want a bank that understands what you are doing and what your plans are,” says McQuaig. “A community bank is more likely to do that. While bigger banks are looking to serve big customers, smaller ones may use other means to qualify business loans beyond a simple analysis of cash flow.” Credit unions, too, says McQuaig, are expanding their commercial activity, but are still not terribly experienced in that area.

Smaller banks are of special importance because of their dependence on small business lending, says Keith. “Their very survival depends on finding quality loans. This is great news for small businesses with good fundamentals.”

But know the downside. “The smaller banks have to be very careful how much they lend, because they have a smaller pool of funds,” says Andrew Clarke, President of Chicago-based small business consultancy Ground Floor Partners (groundfloorpartners.com). “A $100,000 loan default is a much bigger hit on a $20 million portfolio than on a $500 million one. Bigger banks might have tougher terms, but at least they have money to lend.”

Communicate

When it comes to landing a loan, your lab’s numbers alone won’t carry the day.

“Start talking with bankers to build relationships long before you need money,” advises Clarke. “If bankers know you to be a reliable, serious person you will have a much better chance of getting a loan approval. That’s true even though small bankers do not have much direct authority, since underwriting decisions are often made elsewhere. Even so, they can grease the wheels.”

Successful communication is an ongoing process. “Market to your banker like he’s a business prospect,” says Farris. “You need a plan for feeding your banker news about your company and what is happening, so the banker feels comfortable with what you have borrowed. Manage the perception of what is going on with your business.” (For more ways to cultivate bankers see the sidebar “How to Land a Loan.”)

Communication is a two-way street: Keep yourself tuned to what is happening at your bank—especially about any changes that might disrupt your credit line. Business people often assume their line of credit is safe as long as they maintain their covenants. But that is not always the case. “When a bank wants to pull your loan it can come up with a rationale,” says Clarke. “It can find some financial ratio it doesn’t like.”

Be especially wary of bank mergers. “When a big bank buys a small bank there always seem to be unwanted assets that do not fit well with the portfolio,” says Farris. “So the combined bank often refuses to renew certain lines of credit, or refinance loans. And that creates a lot of disruption in the customer base.”

Finally, be alert for a common pitfall: The tendency of small business bankers to move from bank to bank. “You build a good relationship so your banker will help you out when the time comes to borrow money,” says Clarke. “But all of a sudden you find your friendly banker has gone to a new employer and has not yet cultivated those internal relationships required to help you get your loan.”

How to Land a Loan

How can you prepare for a successful business loan application? Follow these tips from Denise Beeson, a small business consultant based in Santa Rosa, Calif.:

1. Understand how much money you are seeking and why. What are the uses for the proceeds?

2. Check the quality of your credit score and that of your business partners.

3. Automate your lab. Are you using a good accounting software program and are you integrating the latest technology so you can show your lab is up to date financially and technically?

4. Will the banker be impressed by your professional team? Even the smallest of businesses can assemble an experienced accountant, attorney, industry consultant, and marketing advisor.

5. Shop around. Some financial institutions offer business expertise assistance and a competitive basket of services. 

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Lab Notes

Data Communication Standard 3.11 Approved for Publication

Labtalk

The Lens Processing and Technology division of The Vision Council has announced that the Data Communications Standard committee, chaired by Robert Shanbaum of Ocuco Inc., has approved version 3.11 of the data communication standard for publication. This new version contains many enhancements to the standard developed over the last two and a half years by the volunteer members of the committee. A copy of the new version can be obtained from the Standards section of The Vision Council’s website. For more information, visit https://www.thevisioncouncil.org/members/standards.

Digital Eye Lab Celebrates a Decade of Service

Labtalk

In 2007, with a team of 12 people and one fabrication line, Digital Eye Lab (DEL) opened its doors with a single mission: to fabricate digital lenses. It was the first fully automated optical lab dedicated solely to digital lens fabrication in the United States.

Today, while other labs have since followed in its path, DEL, which celebrates its 10th anniversary this year, continues to lead the way and pioneer new technologies for its growing, loyal customer base. Not only was digital surfacing a relatively new technology in 2007, but Digital Eye Lab also was an entirely new business sector for its then parent company, Optical Distributor Group (ODG), which later merged with ABB Optical Group in 2012.

“We were not just introducing a new product type, but an entirely new category of products. We were innovating and changing the optical landscape,” said Scott Pearl, managing director of DEL, a role he has held since the lab opened 10 years ago. “Serving as our customers’ first entry point into digital lens fabrication, we were able to provide them with convenient, affordable access to this new technology by shortening historically long wait times, minimizing re-dos and working with prominent manufacturers to offer a choice in lens materials and designs. We understood from the very beginning that digital lenses were the better option for both patients and practitioners.”

Before overseeing the growth of Digital Eye Lab, Pearl was a former independent sales agent who worked with many laboratory businesses in the United States. He helped build DEL’s new state-of-the-art facility from scratch, promoted the lab's unique value among ODG's existing clients to help grow the business, and helped to establish key relationships with lens and equipment suppliers, all keys to DEL’s initial success. From day one, customers knew they could turn to DEL for the latest digitally surfaced designs, which, in 2007, included Seiko Succeed Internal Freeform and Shamir Autograph. Just a few short months after opening, Digital Eye Lab was selected by Indo to be the first U.S. manufacturer of its LifeMade Line of progressives, one of many firsts for the independent lab.

New product offerings quickly followed. Digital Eye Lab’s propriety Digital 5.0 personalized lens series was introduced in 2008, followed by the Digital Master Series in 2013, a proprietary lens line with more than 50 material and coating combinations. Also in 2013, DEL was named as one of Vision Monday’s Top Labs for the first time, an honor the lab has achieved every year since. Another milestone for DEL was being selected as one of the first authorized labs to produce Shamir’s Glacier Plus UV anti-reflective coating in 2014. In 2015, DEL became a Unity enabled laboratory, accepting VSP orders and fabricating Unity lenses and coatings in house.

With an experienced team that has grown more than 10 times its original size and two facility expansions, DEL today has fabricated more than 2.5 million pairs of lenses and is the second-largest independent lab in the U.S. The DEL portfolio of lens designs and coatings includes a large selection from Shamir, Seiko, and Unity, as well as its own proprietary product line. The lab’s new bluDEFENSE Comfort Portfolio offers flexible solutions for digital eye strain discomfort, and its new MOD2 lens design builds upon one of its best performing progressive addition lenses to provide even better performance and acuity.

More growth opportunities are on the horizon for the 10-year-old lab following ABB’s acquisition of Diversified Ophthalmics in 2016. As part of its 10th anniversary celebration, DEL is debuting a new logo with a more modern look that also better aligns with the ABB brand. The lab also plans to unveil limited-time, special 10th anniversary offers to select customers and commemorate its history with various initiatives throughout the year. For more information, visit DigitalEyeLab.com.



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New Products

New National Optronics Distributor Announced

National Optronics equipment is now available through two industry stalwarts. Starting April 1, DAC Vision will become a National Optronics equipment distributor in addition to Satisloh North America.

“Both Satisloh and DAC have large, loyal customer bases. While there is some overlap; there is a significant segment of the market that is complimentary. This new arrangement provides labs and ECPs throughout the US with easier access to National Optronics products,” said Pete Lothes, President and CEO, Satisloh North America. The company has distributed National Optronics equipment since 2010.

“We are excited to offer National Optronics equipment to both our ECP and lab customers,” said David Meisenheimer, President, DAC Vision. “It expands and compliments our existing product portfolio with a known and trusted tabletop equipment brand.”

National Optronics manufactures the only dry edging tabletops available, providing a trustworthy eco-smart alternative to wet edging. Dry edging saves water and eliminates waste-water contamination, spills, and odors. Technical service for all customers will continue to be provided by National Optronics, the most dependable and experienced support team in the industry, based in Charlottesville, VA and with field technicians as well. All National Optronics equipment is built in the US.

Luxexcel 3D-Printed Lenses Achieve ISO Quality Level

Luxexcel has announced that its lenses are compliant with ISO 8980-1:2004 Focal Power standards for ophthalmic quality. Luxexcel lenses are printed with a dedicated 3D printer in an ophthalmic processing laboratory environment. The quality, straight out of the printer, is at industry required ISO quality level. The technology has now reached a stage of maturity where specialty lenses can be provided to the ophthalmic market.

“Luxexcel has developed an industrial 3D printing platform to 3D print specialty lenses like monofocals, bifocals, trifocals, with cylinders and prisms,” said Hans Streng, Chief Executive Officer of Luxexcel. “The lenses are thoroughly tested and on ISO quality level. This opens up business opportunities for ophthalmic labs to manufacture a wide range of specialty lenses with our technology.”

Luxexcel will be shipping the printing platform to ophthalmic labs this year.

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Brian Dunleavy, Editor, LabTalk/LabAdvisor

Brian is the Editor of LabTalk. He covers wholesale laboratories, lab systems, other ECP news and features/coverage. Contact Brian at [email protected].

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