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Transformix CEO Peng-Sang Cau in Kingston: ‘Our banks are too conservative.’ (Lars Hagberg for The Globe and Mail)
Transformix CEO Peng-Sang Cau in Kingston: ‘Our banks are too conservative.’ (Lars Hagberg for The Globe and Mail)

Moving Forward

'Our banks are too conservative,' frustrated business owner says Add to ...

We explore 10 key challenges for business leaders in 2014, with expert commentary on the issues.

They are the little marvels of the consumer world – those intricate pumps on bottles of perfume and spray-on lotion, with their fitted plastic parts and tiny metal springs that look so tricky to assemble.

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Someone has to make those.

Kingston-based Transformix Engineering specializes in developing and building the manufacturing equipment that assembles those tiny parts at speeds of 50, 200, even 2,000 parts per minute.

Yet the mid-sized company, which recently grew to 103 employees from 30 and whose business is about 90 per cent exports, reports that it still typically faces reluctance from banks when looking to finance its growth.

Not every business finds the same hurdles as high-tech companies. The retail and service sectors are seeing a general easing of credit, particularly with interest rates due to remain low in 2014. But for many, credit remains tight as business cycles ebb and flow, requiring alternate strategies for borrowing and keeping cash flowing.

“Our banks are too conservative,” said Transformix’s chief executive officer, Peng-Sang Cau, who is one of the company’s original founders, starting in a basement in 1995 with a $3,000 loan to purchase a computer.

“The analogy I give to young entrepreneurs is that if the sun is shining, banks will come and say, ‘Do you want an umbrella?’ ... But the minute it looks cloudy, they will pull that umbrella from you and they will let you go,” she said, noting the common up and down cycles in manufacturing.

“And that’s what happened to Transformix. We were going through this crazy growth, and we were doing well, cash flow was great, and all the major banks wanted to partner with us, wanted to give us a line of credit. And the minute it was kind of cloudy, they wanted their money back.”

Transformix develops its machinery from the initial design, right to building it and shipping. “We are what we call in the industry a complete turnkey organization. These are big machines that are being shipped,” she said. “As an example, we had a machine the size of a football field that we had to take apart and ship to Austria.”

The company has developed a new kind of continuous motion machinery used for manufacturing medical devices, such as intravenous needles, as well as consumer goods, such as advanced spray-on sunscreen pumps. Transformix has sold about eight or nine of these machines and is shifting into this area, which is expected to bring another upswing in business.

“We will be going through growth, but not quite yet right now, because we’ve just developed this product,” she said.

Yet developing the equipment is capital intensive and requires funding at the very earliest stages. So Transformix has found an alternative to bank loans: getting its customers closely involved in backing research and development.

“Our R&D is funded with government grants, but at the same time we also work with our clients to ... get those projects first, so that they support our R&D as well,” Ms. Cau said.

There are two possible strategies, as Ms. Cau sees it. Businesses can either focus their time and energy on courting customers and getting them to help back R&D. Or companies can look for venture capitalists and angel investors looking to take on risk.

“We’ve decided to grow organically by getting the customers, generating revenue and growing our business that way,” she said.

“I’ve heard this from a lot of my colleagues in the business world – that the lack of available capital to fund high-tech companies is an issue we have in Canada,” she added.

There are many alternative ways to structure loans, however, or to increase cash flow with factor financing. This is when a middle person is hired to do the job of collecting customers’ bills upfront, thereby allowing a business to get its money faster – but at the cost of paying the middle person.

“We work with customers to help fund the project along the way. We have been looking at factoring companies, and we actually may be signing a deal shortly with one. But my challenge there is that they are so expensive, that it really makes it hard to justify,” she added. “The middle man is really expensive, and I think for a lot of businesses, it’s a really hard pill to swallow unless it’s a necessity.”

As banks get tight with some businesses, it can then affect a company’s ability to access capital elsewhere. The Business Development Bank of Canada, set up by Ottawa especially to promote entrepreneurship, nevertheless requires a company to already be working with a chartered bank.

“Over the last eight years or so, what I’m seeing with the banks is that they are taking the decision-making ability away from the local managers. And when decisions are at the corporate level, it’s basically checking boxes. And if you don’t fall under the perfect umbrella of what they define as the business that they want, it’s not going to happen. So I think it is getting more difficult for Canadian businesses out there,” Ms. Cau said.

The experts weigh in

Stan Prokop

Founder and chief executive officer of 7 Park Avenue Financial in Toronto

Banks are willing to lend, but they are choosy, he says. “Bank capital has never been easier to get and more abundant, if, in fact, you qualify. Banks have pretty strong criteria around profits, the quality of the balance sheet and historical and future cash flows.

“So, just as an example, if you’ve been doing great for 10 years and this year lost a lot of money for a variety of reasons and then went to the bank, a new bank wouldn’t refinance you from your old bank because they’d say you were losing money.

Mr. Prokop points to alternatives such as factor financing. “It’s similar financing to bank lines of credit, except that in the case of factoring, you’re not financing your receivables on an ongoing basis. You are selling them” to the middle person who then collects payments from customers, he explains.

Merril Mascarenhas

Managing partner at Arcus Consulting Group in Toronto

Financing is of greatest concern to mid-sized businesses in the near future. The dollar amount of bank lending to mid-sized companies of between roughly 100 to 500 employees “is growing 3.2 per cent a year in the mid-market. It’s growing a lot faster in the larger [sized] market at 5.9 per cent, and it’s growing slightly slower in the small-business market at 4.2 per cent. So the mid-market seems to be growing at a slower rate than the large and the smaller market,” Mr. Mascarenhas says.

“Transformix is in manufacturing, in a very capital-intensive sector. So the dynamics for them, I think, are slightly different and their cycles are probably much longer than your typical mid-sized business. Their capital requirements probably have much longer business cycles.

“So, I think they would be a lot more challenged than others. We’ve seen a lot of growth mostly in the services sector with regard to easier credit terms, and tighter lending around collateral-backed credits with firms such as Transformix.”

Expert comments have been edited and condensed.

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