Vendor Financing for the WISP Industry
September 28, 2004
WISP owners are using home equity and credit card loans to finance new wireless equipment, but one group of investors think they can charge lower rates and still make a profit on the buildout.
A group of WISP industry entrepreneurs is working with a technology finance expert to lend money to WISPs. This is a big story because there is no financing at all available to WISPs right now.
Hal Hayden, the financial expert at Prescott, Ariz.-based Agility Solutions Corp. says that traditional sources of finance are closed to WISPs. "The key, therefore, is a private fund for funding WISPs. But people offering financing in the market are not successful at approving loans to WISPs, or at selling paper to secondary sources of funds like GE Capital and Citicorp."
That's because traditional vendors of cash have placed WISPs on a "no loan" list. "They're red flagged WISPs," explains Hayden. "There are three reasons:
- WISPs are considered an ISP, and they're not lending to ISPs.
- WISPs are part of the telecoms business, and they're not lending to telecoms.
- WISPs are early stage companies, and they're not lending to early stage companies."
Thus, Agility has raised cash directly from investors, promising a relatively high rate of return to individuals and institutions. The company also has the advantage of a better understanding of the WISP industry than, say, Citicorp. The company's other two co-founders (besides Hayden) are WISP entrepreneurs: Bill MacNamara of Payson, Ariz.-based Canyon Broadband and formerly of Big Sky Internet and Robert Bratter of Canyon Broadband. Mark Davis of Commspeed provides further advice to Agility.
MacNamara says that many people understand the opportunity offered by the WISP business, but are too optimistic. They make the initial investment, but then need more money to grow. "But we found WISPs run out of capital after the first year of rapid growth. I've heard this again and again at trade shows and in industry chat rooms."
Initial capital can come from friends or family, creating personal tensions. It can come from a home equity loan. Some WISPs even borrow at ruinous interest rates by maxing out credit cards.
When WISPs raise initial capital and spend it, they buy a large amount of equipment that they cannot deploy immediately. Having 100 radios sitting in the office, but only two employees for deployment, means those radios will be idle, tying up capital, notes MacNamara.
WISPs are desperate, says MacNamara. "We looked at one company and saw they had a line of credit. We asked how they'd secured it and the WISP owner said their family had given $100,000 to the bank. Frankly, the back was lending these people back their own money."
Due diligence due WISPs
Agility can do better, with better due diligence. "What we do when we get engaged with a customer, is that we send them a customer survey to find the demographics of the market they're in, and the growth potential," MacNamara explains. "That gives us an idea of what we're starting with. In a traditional finance relationship, you look at just a few points, but the WISP industry doesn't pass those tests well at all. We look at who the operators are, what cash they have put in. Mark and I go through the business plan and decide if the information we've been provided is good information and if the business plan is executable."
Even with all of that research, the company is hedging its betsbecause it cannot secure them. WISP equipment depreciates fast, but the IRS doesn't allow depreciation faster than five years, while most WISP equipment is replaced before the five years are up. "Sometimes, we require guarantees for deals, or several months of payments up front, " explains Hayden. "We may require 10 percent of the amount we'll fund as a security deposit (but that's still less than a bank or other lender would require)."
Millions to lendThe fund is opening with $2 million, and expects to close with $10 million, placing the money over the subsequent 6 to 8 months. Deals will vary widely in size, ranging from small, for a rural WISP growing from 60 customers to 300, to larger, for a WISP that already has several thousand customers and is adding 150 per week.
The deals will not shove all the cash to the WISP at once. Instead, they involve a "master lease" agreement that allows WISPs to fund each build as necessary, on a quarterly basis. Nevertheless, no one WISP can get more than 5 percent of the whole fund.
The fund will have a loss reserve of 6 percent, which is relatively high for equipment leasing, Hayden says. That means Agility expects no more than 6 percent of all loans to be writeoffs. The equipment leasing industry average is between 2 and 2.5 percent, Hayden says.
Prevailing low interest rates make it a good time to raise cash for a relatively high risk fund. The co-founders believe the fund will prove, in practice, to be less risky than it appears to be on paper, which is why they are limiting the fund to $10 million. "We would like to plan on having a second and successive funds," says Hayden. "But we would like to see first how this fund goes."
The only risk Hayden foresees is an interest rate rise. "We bumped up the yield to investors maybe 100 basis points above what we had to, to enable us to lock in investors for three years. Once the lease is written to a client, that lease is fixed and the client has no risk."
That combination of high risk for the lender, low risk for the recipient, and exposure to interest rate fluctuations killed off vendor financing in the telecom industry. Agility reports that equipment sales people are thrilled to know millions of dollars in financing will soon be available to WISPs. But Agility will need to avoid the mistakes the equipment vendors themselves made in lending to this market. That won't be easy.
On the other hand, MacNamara reports that all equipment vendors are eager to work with agility to build the sort of sales stream that vendor financing enables without taking any risks themselves.
If it succeeds, Agility will be more than just a financing company. As they examine more and more WISP business plans, MacNamara and Davis find themselves giving free advice. It therefore makes sense that the company could branch out into consulting. Of course, a mixture of consulting and accounting led to the fall of Arthur Andersen. That sort of problem, should it ever arise, is a long way away from today.
Reprinted from ISP Planet.