Transcript
Greg Mader: [00:00:00]
Today, we’re speaking to Jeff Bland president of Tri-Fin Capital located in beautiful San Clemente, California. Tri-Fin Capital is a boutique lease funding company focused on the it space. Jeff, thank you so much for being on the podcast today.
Jeff Bland: [00:00:18]
Thanks Greg. Thanks for having me looking forward to it.
Greg Mader: [00:00:21]
So I always start with this question is a bit of a warmup. What is your favorite snack food?
Jeff Bland: [00:00:28]
I love that. My favorite snack food is old fashioned. It’s a nice apple with some peanut butter.
Greg Mader: [00:00:37]
Peanut butter and apples, okay.
Jeff Bland: [00:00:39]
Just a little bit of protein and some fruit. And I’m good.
Greg Mader: [00:00:43]
Are you by any chance, are you cutting up the apple and then sticking raisins on it? So you can have the ants on a log or not so much?
Jeff Bland: [00:00:50]
No, no, I haven’t graduated to that level yet. Right. But I’m willing to learn. Um, but just standard apple slices with some peanut butter goes back to when Iwas a kid.
Greg Mader: [00:01:02]
You are in contention for the healthiest guest we’ve had on. So thank you, Jeff. I’d like to get right into the heart of the matter here, something that
you’re an acknowledged expert in. And that is the options the company has to pay for a transformational business it project. Can you talk a little bit about what options a company might have?
Jeff Bland: [00:01:25]
Sure. Traditionally, just to give you some background, I have been involved in various stages for the last 20, 25 years, structuring and funding transactions in the IT space.
Either, you know, hardware, software services, combinations of both. And when a company traditionally looks at purchasing an asset, they can either fund it out of cashflow, they can fund it through their line of credit, or they can fund it through a separate line of credit, which is what we prepare and do and provide.
All of them have different pros and cons like anything in life. Traditionally going back, if you go really deep, you can say, “Well, you know, we’ll structure this as OPEX or we’ll structure this as CAPEX.” But our focus has been providing a specific niche facility to handle a specific asset acquisition.
So it preserves the line of credit that the customer has, and it has minimal impact on the cash flow of the customer. So it flattens, the investment curve, the hockey stick, so to speak.
Greg Mader: [00:02:41]
So why would a company consider a lease option versus a loan option? What are the differences?
Jeff Bland: [00:02:50]
Well, simple interest loans are traditionally not offered in the commercial space for tech equipment, such as software and services and hardware. You mightbe able to get a term finance from your bank if you went to pursue that with them. But most banks are specifically not interested in soft collateral transactions.
So as a traditional lease versus loan, leases are a much more commoditized product. And much more easily available than doing a simple interest loan transaction.
Greg Mader: [00:03:28]
Are there tax benefits associated with the lease versus a loan?
Jeff Bland: [00:03:34]
Well, on a capitalized loan, you’re going to get the depreciation benefit. The customer will get the depreciation benefit. Similarly, with a capitalized lease product, the customer will get the depreciation benefit. Doing an OPEX or an operating lease, the leasing company takes the depreciation and the customer is then expensing the payments and pulling that off balance sheet and recording it just as an expense line item.
So depending upon what the financial goals are of the client, it really depends on what they want to do. Both of them are pluses and minuses, right? It’s whether you want the depreciation or you want the expense. How you view the asset, that’s where you get into the calculus of what and how the business wants to record the transaction.
Greg Mader: [00:04:24]
That’s really helpful, Jeff. For your average director of IT, these are the kinds of questions that they’d be asked by a director of finance, and it’s good to help them have the same language when they’re speaking together.
Jeff Bland: [00:04:39]
Absolutely.
Greg Mader: [00:04:40] So as you’re evaluating an application, I think you’re probably having to pick up on whether a company might be successful at a project or not because you don’t want to be stuck with a deal that is unsuccessful or unfruitful. From sitting in the bleachers, what are some indicators that you’ve found that a company will be successful in its IT projects?
Jeff Bland: [00:05:04]
Partner selection. Greg it’s, it’s really funny having been doing this for a long, long time, right? In our lab in the last 20 years, we’ve only had three.
What I would consider workout situations, and we have funded millions and millions and millions of dollars in software and hardware, more so software these days than hardware, but millions of dollars in projects, the three workouts that we had where we had a failed implementation it was due to the client. It was not, in my opinion, making a poor selection of the partner, the implementation project lead partner, or the vendor in the project, and that vendor maybe misrepresenting their strengths and capabilities in terms of delivering on the project plan. And from that starting point, yeah, it was almost like I was watching in slow motion, the train wreck happening.
Until we got to the point where the partner, the implementation partner was in, above their head and the client was pulling their hair out, saying we’re not in alignment on what needs to be, what needs to be going on. And then we get into the situation of starting the workout, getting a new partner.
You know, keeping the lawyers at bay, et cetera. So to make a short story long or long story short partner selection is number one, making sure that you’re in alignment with the partner, obviously product selection, making sure that your product or what you’re looking to acquire actually fits the needs of what you’re trying to do within your company.
It’s like the old carpenter rule, right? Measure twice. Cut once. Sometimes, people go into these things a little too quick and it can create problems. If that answers your question.
Greg Mader: [00:07:00]
It does. That’s really helpful. Are there any early warning signs, can you tell from a project charter or other documents that they might have a hiccup.
Jeff Bland: [00:07:12]
Well, obviously from a credit perspective, when we’re evaluating and setting up a facility, which I highly recommend, regardless, I mean, most of our customers
are all very, very well-run companies with solid P&L’s and solid balance sheets. So we do a thorough evaluation of the customer’s cashflow creditposition, et cetera.
The vendor knows what’s going on. The customer has this facility. And from that perspective, there is a high probability that financially we will get through the project without having any hiccups. So it becomes very important too, because once we have a financial facility put in place, everyone is operating within that box.
So if the project is a million dollars, then. Everyone knows that there’s a million dollar credit facility for the project and we’re operating within that box. So if I were to circle back and say, Greg, is there an indicator? The indicator would be looking at the credit position of the customer and seeing a lot of problems with their cashflow and their balance
sheet and P&L that’s an indicator that there’s something going on wrong with the business, and that can lead to credit problems, cashflow problems, project problems, et cetera.
Greg Mader: [00:08:31]
Jeff, that is blindingly obvious when I think about it, but I hadn’t quite ever thought about it that way. Thank you.
Jeff Bland: [00:08:40]
The subtle is a flying mallet, as I like to say.
Greg Mader: [00:08:42]
Yes, it is as subtle as a flying mallet. That’s very good.
As you mentioned this, it seems that if a company commits to this sort of loan facility or lease facility, it probably reduces the risk of the overall project quite a bit. Is that your perception? Is that part of the value of these sort of arrangements?
Jeff Bland: [00:09:05]
Correct. It’s a security valve and it’s another level of project management.
So from a vendor’s perspective, when you’re going into the project, there’s always risks when you’re doing a IT project, right. Greg, I’ve never been involved in a project in the last 25 years where there weren’t change orders or bumps in the road, right. Even in the most well scoped project, there’s always something: “Oh, by the way, can we do this? Yes,
we can, but it’s going to cost more.” You know, you get into these discussions. Having that facility ensures that the DSO to the partner is radically reduced, and that, from the customer’s perspective, they know that they have a defined facility where they’re not going to get big spikes and cash or an, “Oh, by the way, it’s going to cost us an extra a hundred thousand dollars here, $200,000 there.” It’s just a flat monthly payable that they can accurately forecast and predict, and they know that there’s an amount of cushion that’s built into the facility to handle unexpected change orders or things that just evolve into the project that weren’t anticipated, despite the best scoping efforts possible. So it reduces the risk to the customer. It reduces the risk to the partner, right? And from our perspective, it allows us to get ROI in return on our money that’s put out the door, so it’s beneficial to all parties.
Greg Mader: [00:10:29]
That’s really cool. Jeff. One question that comes up regularly, if you’re a director of IT at a company right now, you may get pressure from your board, for cloud applications.
And that’s all the other executives may know about it. Sometimes they know quite a bit. Sometimes they just have heard from a friend
about the cloud. So if you’re thinking about, a traditional IT project and maybe financing it versus a SAS solution in that sweet, sweet song that they sing about operating expenses.
Are they actually cheaper?
Jeff Bland: [00:11:08]
Well, that’s an interesting question. It’s a very—it’s a tricky question, Greg, you trickster.
Okay, so how do I explain this from my perspective? Okay. People talk about doing subscription and treating everything as an expense, which is fine. Okay. Fundamentally that’s okay. However, what always cracks me up or what gets a chuckle out of me is that when we do, we get into discussions about doing a subscription on software and op ex, et cetera, then the discussion comes in, what about my ROI associated with this project now?
ROI is return on investment investments aren’t expenses. Expenses are cost reductions that are placed, to offset income. Investments are recorded on the balance sheet. So you’ve got these two diametrically opposed ideas, some of which is almost like client confusion, in terms of what they’re trying to do. So once again, to make a long story short, cloud can be great if you have, if you know exactly what you’re doing and why you’re doing it. If you have a need to be up in the cloud, it’s perfectly fine. It’s great. It’s great if you have multiple sites, multiple users. You’re scaling up, scaling down. Its awesome. If your business is not that way, if it’s not set up like that, if it’s a simple operation, why would you do that? Especially from the perspective that the software that you’re implementing into your business could be very integral to your operations and actually be a real asset. I view software as an asset. So it’s a tricky question because it brings up a lot of issues in terms of how you evaluate IT within your business.
I personally look at IT, in the digital age in which we live, as being everything. People aren’t doing manual spreadsheets anymore. Everything is electronic. Everything is digital, everything is dashboards. So how you record that and what you do is a very individual choice within a company’s perspective.
We can go either way. We do balance sheet transactions and we do rental contract transactions for booking in OPEX. But from an IT director’s perspective, I think that’s a soul searcher. I think you really have to evaluate what you’re doing and why you’re doing it. If that, answers your question.
Greg Mader: [00:13:51]
It does.
I think I’m in a similar camp to you where I think software as service solutions are great for some applications. The cloud is actually has very little to do with this. As you know, I hear people all the time who are confused about cloud native applications or cloud hosting, or traditional hosting. And that’s where some of the confusion lies.
What I think people should realize is that I don’t think it does have to be all one or the other, and that you can have, what a smart guy named Chris once told me, partlycloudy solutions. And I think that’s about right. Some things may make more sense to keep in house or host in a cloud, but you still may want control of the source code in applications.
In fact, that’s what I built my whole business around. But I also recognize nobody really wants to mess with their own email server anymore.
Jeff Bland: [00:14:50]
Yes, sir.
Greg Mader: [00:14:51]
Yeah. There’s so many great solutions out there, so let’s just go with one of them and not think about it every day.
Jeff Bland: [00:14:59]
Yeah, I agree.
I agree, Greg. It’s a deep topic and we could discuss it for a long time, but I think you and I are in alignment on that. I think you have to make some decisions and not get caught up in the hype in terms of, you know, everybody and he’s doing this, so we should do this.
My dad told me when I was a young man if everybody is jumping off the bridge, are you going to jump off with them? No, I’m gonna make my own decisions and think about what we’re doing.
Greg Mader: [00:15:22]
Let’s get back to the question of what does it look like to have a lease for an IT project? Can you talk a little bit about what the process would be if you’re interested in that? What are the terms of the lease? What’s it look like when the lease is over? Tell us a little bit about the life cycle, Jeff.
Jeff Bland: [00:15:41]
Sure, so let’s box that a little bit more. Are we doing a capitalized lease or are we doing an op ex rental contract?
Greg Mader: [00:15:50]
Let’s do a OPEX rental contract.
Jeff Bland: [00:15:54]
Okay. OPEX rental contract.
So the first thing we start out doing is credit due diligence, which is boxing the project: understanding the software costs, the implementation costs, if there’s any hardware costs, just boxing the costs.
The second step is doing cashflow balance sheet credit analysis, determining what the risk profile of the client is and what pricing is going to be associated with the debt on the contract.
The third step is laying out pricing for the customer and presenting it. These are what the cash flows are going to look like over the next 36 months, 24 months, 48 months. Typically, we do 36 months because that matches the typical subscription contract.
From that position, we will document it through our rental contract. The customer will execute closing documents. We will activate the facility, whatever that amount might be, and then we’ll be in contact with the vendor or the implementation partner to understand what the project plan is in terms of funding. And we’ll start we’ll start the funding. If it’s X amount on day one, then day two, the customer will sign off on those fundings and we’ll wire transfer to the vendor those funds.
And then we’ll start billing incrementally on the contract, just like a traditional line we bill on what is used once implementation has been fully completed. We will truncate the implementation period. And then we’ll start a three-year run on the lease, fixed payments over the term. At the end of the lease, the customer then has the option to walk away from the lease contract.
They have an option to renew the lease contract with a new subscription, right. Or they can purchase the subscription or the services at some type of nominal value that we determined, but traditionally, if we’re doing OPEX and a OPEX rental contract, purchasing at the end is really not an option.
It’s just, a monthly payment subscription basically for the entire project, including the services.
Greg Mader: [00:18:12]
Okay, great. Jeff, you’ve been doing this awhile. Do you have any stories from the school of hard knocks?
Jeff Bland: [00:18:20]
Good partners make you; bad partners break you, right? That’s that is about as simple as it gets. Good partners will make you better, because not only do they have their best interests at heart, but they also have your best interest at heart, bad partners are bad partners. They do not have your interest at heart at all, and it’ll be best to separate early and often, quickly.
Greg Mader: [00:18:49]
Well, you’ve brought this up a couple of times, Jeff, so let’s pretend I’m a director of IT for this food manufacturing company that makes apples and peanut butter kits. Okay?
Jeff Bland: [00:19:02]
Sure.
Greg Mader: [00:19:03]
What warning signs or what things should I look out for when I’m looking for that partner?
Jeff Bland: [00:19:08]
I think, first of all, are they technically competent? Right? You know, do they know what they’re talking about? How long have they been doing it? You have to, you have to know that. And then secondly, do you connect with them on a personal level? Are you comfortable in doing business with them? Because in business, as you know, Greg, there there will be bumps. There will be bumps. And if the people that you’re doing business with, if you have a good working relationship with them and you know that they are a good character, you know that they will do their best without having to be prompted to rectify the situation, and that is so critically important in business.
At least from my perspective, that is so critical. The partners that I work with, I have excellent working relationships with them and I, and I trust them to be doing the right things, and handling things without having to go to Def-Con Four and finding out later that, “Hey, this rehab is a huge, massive problem, and oh, by the way, if he didn’t ask about it, I would have tried to bury it under the rug.” So if that answers your question, it’s fairly simple, but I’ve found it to be—I’ve found it to be true.
Greg Mader: [00:20:18]
Okay. That’s really helpful, Jeff. Is there a little bit of if it sounds too good to be true, it is too good to be true? Is that part of this as well?
Jeff Bland: [00:20:30]
Yeah, I think there’s I think there’s always some of that Greg in this world, for sure. If it sounds like faith, trust, and pixie dust created this, there’s probably a little bit of that in there. But you know, you’ve been around a long time, and you’ve done a lot of things too, and I’m sure that you’ve found there’s a lot of truth in the words that I’m speaking.
Greg Mader: [00:20:51]
There is Jeff. Occasionally, I have to think about how do I want to introduce myself because telling the world, I’m an IT consultant, might get me a bad glare from somebody who had a bad experience and so…
Jeff Bland: [00:21:04]
No, you’re a good guy. You’re technically competent and you’re very likable, so you’ve got it going.
Greg Mader: [00:21:10]
I’m working on both. Thank you though, Jeff. That’s it. Let’s wrap it up. Jeff Bland, President of Triffin capital.
Thank you so much for being on the podcast.
Jeff Bland: [00:21:21]
Thanks, Greg. I really appreciate it.
