A sound business decision Featured

9:51am EDT July 22, 2002

What do the pope, Drew Carey and The Spice Girls have in common? They all have enlisted the help of Tom Arko.

His Cleveland business, Eighth Day Sound, provided the sound equipment for Pope John Paul II’s 1988 visit to Detroit, and was recently called upon to install a state-of-the-art audio and video system in Drew Carey’s Brookpark home.

The list of musicians Arko has worked with over the years is a laundry list of popular acts ranging from Jethro Tull to Prince to Tony Bennett. Eighth Day Sound also provided audio equipment for The 52nd Presidential Inauguration, MTV’s New Years Eve television special and the rededication of the Statue of Liberty. The company’s success has been built on continuous investment in equipment to keep up with new technology and customer needs at a cost that routinely tops $1 million a year.

But in the company’s early days, securing financing to build inventory was a monumental challenge. Growing pains first set in at the end of 1983, and Arko applied for a $125,000 SBA loan to buy more equipment. He received the loan, but just six months later, needed another $225,000 to keep up with industry demand.

Explains Arko, “We applied for the SBA loan and received it, and it was a stretch for them to give us what we asked for, but they did. Six months later, we went to the bank for more money.”

That’s when things got tricky. Even with a solid history of paying his bills — and a tidy profit shown from the first loan — the bank was wary of loaning Arko more money. Instead, it granted a portion of the request, then referred him to a private leasing company for the rest of the equipment. Fifteen years later, Arko is a true believer in equipment leasing, and espouses the benefits of leasing when a company is growing.

Providing financial flexibility

“The only reason why you finance is to manage cash flow, and this is a means to do that,” says Cathy Bellante, CFO for Eighth Day Sound. “If we were to pay $1 million outright, we wouldn’t be able to maintain our operation.”

In such a capital intensive business, leasing has allowed Arko to purchase the vital big ticket items he needs to meet customer expectations while keeping a handle on the day-to-day financial obligations such as payroll.

He is not alone. In a recent survey of business owners by the Equipment Leasing Association of America, 35 percent said the main reason they decided to lease equipment was to address cash flow issues.

Lowering risk to company assets

Rather than ante up company assets as collateral, leasing companies require only that a business insure the equipment it is leasing, but other property is not included in the equation.

“It limits the collateral to the thing you are leasing as opposed to all of the assets of the company,” explains Bellante. “We do have loans with the bank as well. Basically, all the assets of the company are collateral under the loan, but under a lease, you are limited. If you have a truck lease, you are limited to the truck.”

Creating an escape hatch

Although most lease deals are arranged so companies will want to purchase the equipment at fair market value when the agreement ends, it is not mandatory. This perk gives business owners a chance to walk away after they have fulfilled their lease obligation if the equipment doesn’t meet their current needs. Arko decided to lease the tractor-trailer rigs his company uses to haul sound equipment for that very reason.

“We happened to exercise the purchase option because of the way we took care of the trucks,” says Arko. “And they were designed very well for our needs. Although we exercised that option, we wanted the freedom to walk away just in case they were lemons.”

Helping facilitate growth

One of the most important aspects of leasing is that it allows companies to keep up with the demands of the industry. For Arko, it is vital to be on the cutting edge of new sound technology if he wants to remain competitive.

“It comes in handy, since we’re always spending money and always have to be prepared to spend money,” says Arko. “If you sign a new contract and they need new technology, the company has to be able to do whatever it needs to do to make it happen.”

Leasing also allows Arko to more easily map out what new equipment he can buy every year, rather than be saddled with paying crushing loans on equipment bought in the past.

“Every year we can buy new equipment,” says Bellante. “We’re not stuck with the fact that three years ago we spent $1 million and we’re still trying to recover from that. It allows us to continue to grow our inventory and improve our inventory.” How to reach: Eighth Day Sound, (216) 961-2900; The Equipment Leasing Agency of America, www.elaonline.com

Jim Vickers (jvickers@sbnnet.com) is an associate editor at SBN.