April 2011

Thermo Credit — Filling a Need When Opportunity Rings

It all started with a good idea. And like many other companies that established themselves based on this premise, so too did Thermo Credit. Ten years ago, a group of individuals came together to discuss the possibilities of launching a company to fill what they deemed the underserved niche in telecom, and by the next year, Thermo Credit was established to fill that need within the constantly evolving telecom industry.

Even more than filling a void, the founders of Thermo Credit realized something even bigger: the lack of funding opportunities in the telecom industry, according to Seth Block, EVP of External Operations. “Everybody that is on our board came from the telecom industry, so we were very in tune with what was going on — we looked at that as an opportunity to get into factoring.” So Block and the other members of the board including James Lynch, president of Thermo Credit and Jack Eumont Jr., EVP of Internal Operations, inked a business plan, received the necessary financing and launched the company by June 2002.

Like the telecom industry, Thermo Credit has also changed with the times. At its inception, the company began to provide factoring to (local exchange carrier) LEC-billed companies. More than a decade ago, long distance was sold by numerous companies but was all billed on a local phone bill. “Our clients, ABC Long Distance Company, had an agreement with an aggregator who sent the records to the AT&Ts and [Verizons] of the world. They billed it, the money came back and it was distributed back to our clients,” Block explains. “So when we started, we were exclusively doing factoring for those types of companies.”

As that “model,” he says, started to fade into history, about five years ago, Thermo Credit began working with local dial tone providers and started to expand from only factoring to also include A/R lines and asset-based lending into its list of services. Block notes that Thermo’s decision to expand its offerings coincided with the massive changes occurring within the communications industry.

And these were changes Thermo was more than prepared to handle. Like Block, who has more than 25 year of experience in management and the development of service-based companies, many of the company’s board and officers worked in the telecom industry as well as in operations before launching the company. Block earned an accounting degree from Southwest Texas State University, and is a licensed CPA.

Throughout his early career, he was involved in the startup of several companies, based in Texas, and also was a senior level accounting manager, responsible for M&A at Service Corporation International. Before joining Thermo Credit, Block was a co-founder of Smoke Signal Communications, a provider of pre-paid local dial tones. Serving as senior vice president, he was responsible for corporate development, regulatory affairs and RBOC relations. He also consulted within the telecom industry, aiding other companies in financial management as well as regulatory compliance.

For Block, joining Thermo Credit was the next step in helping companies get the products they need to grow. What drew him was “putting together a product that I saw could be a real benefit to companies… It was a wonderful thing to be able to offer a product that you know can help people.”

Today, the company finances traditional telecom, wireless, data and Internet-based companies with transactions ranging from $250,000 to $20 million. The company finances deals mainly within the United States and Canada, but will consider deals outside this area if, Block says, it can be comfortable with the region’s security laws. With headquarters in New Orleans and an office in Charleston, SC that handles the East Coast, Block notes that the company is looking to expand in major communications hubs. As of mid-March 2011, Thermo has hired employees in Los Angeles and will announce the opening of an office in that city in the near future.

Factors financing in almost any industry perform many of the same checks when qualifying companies such as looking at the receivables, the collections, the cash flow and the return on the receivables, but Thermo Credit goes beyond that. “Our due diligence requires us to go a few steps farther: we have to look at the regulatory issues at hand, and then we also have to look at the carrier relationships. Almost every communications company is buying their service in one form or another from another carrier. We have to understand that relationship between them and the other carrier,” Block explains. This consists of understanding how and when the other carrier could “cut them off, as well as what the contract allows them to do,” he adds. “The last thing we ever want to see is one of our clients get cut off by their carriers and not be able to perform their services.”

Because telecom companies’ collections are very sporadic, Block says this also presents an extra effort in order to understand and fund these customers. “They’ll see a rush of collections come in the first ten days after they bill. Then they’ll see another group of it come in before the 30 days are up, and then the final balance of it will come in within 45 days. A typical factor would not extend the excess collections to their customers until the entire batch was collected. We actually send back the 20% or whatever the reserve is that we’re holding. We send that back as the money comes in.”

Block says Thermo does this because these customers would lose a lot of the benefits of factoring by not getting some funds during the actual collection process. “It is unique. I think we’re unique as compared to other factors. We have to monitor our clients very closely to make sure we’re not getting upside down, but I think it takes it one step farther and provides a better service for our clients.”

Staying on top of the clients’ never-ending needs for updates in telecom is a constant challenge for Thermo, but one the company thrives on. Understanding the evolving technology within this industry is imperative for the factor. While making certain to understand the technology the client is using, Thermo must also understand “what the risks are within that technology, how fast are the assets that they have acquired going to become obsolete? What’s the changing trend in the inventory?… If they are working a technology that you know is going away,” he says, Thermo needs to evaluate the future of the deal. “You don’t want to get into a situation where you’re in with a company, they haven’t responded to the technological changes and now they have no way to really service their debt, the company gets in worse shape and you find yourself in a bankrupt situation, which we never want to see. We pay very close attention to technology.

“Having said that, it does pose a lot of challenges for us, but it also poses great opportunity because as the technology changes, companies need funding to take advantage of that new technology and that’s where the opportunity is for us.”

Factoring, as well as asset-based lending, has proven to be an important form of funding for small and niche companies. For Block, it’s important because it allows companies to expand, especially during down economic times. For telecom companies, factoring is important not only for updating technology, but also for their marketing purposes.

Marketing, too, is important because of the changing technology and services these clients offer. “Marketing is such a key component to what these guys do — so the more they can market, the more they can grow their business. Especially when they have new technology and they want to really ramp up their business, factoring can give them funding they couldn’t get any place else. They can use those dollars toward marketing and really take advantage of an opportunity to grow their business.”

In order to succeed in this close-knit atmosphere with the customer, Block says that Thermo is interested in being a partner with its clients. “We’re very vested in this industry. We come into any situation, we really try to analyze what’s going on within the company. We try to put together facilities for them that’s truly a win-win… Every facility we look at, if we cannot see it’s going to improve the company, we won’t do it. In that regard, we feel we are truly a partner with our clients.”

Moving out of the recent economic downturn as all financing companies did, Thermo is now looking toward its future with a somewhat new outlook on how it covers clients nationwide. “We discovered the best relationships we have are the ones that we have been really able to cultivate … where we really had the opportunity to get to know the clients well before we did the funding.”

Thermo used to take a national approach to its marketing, Block notes. Now, Thermo aims to place offices around the country in areas that are “communications hotbeds,” including states like California, Texas, Florida, Georgia, Illinois and New York. “It’s our plan to open up five offices in the next year in a half to two years — have established salespeople in those markets to really build relationships with companies and put together good facilities for folks in these markets. We’ll certainly do deals across the country, but we really wanted to have feet on the street in the key communications hotspots.”

Block’s outlook for the factoring and ABL industry is positive. He says, “We’re very positive on factoring and of course A/R lines and the ABLs, but in particular factoring because we’ve just come through a tough economic time. We saw some good companies that we were able to go in and help prosper during these times because they were able to take advantage of consolidation and get some good acquisitions… We see a lot of that on the horizon. I don’t think that traditional banks are — they are getting a little more free on their lending, but I don’t see them opening the floodgates. I think factoring is really going to be a significant tool for companies out there to be able to grow.”

He adds, “I always tell people if they get all wrapped up in the cost of funds, and they don’t talk to asset-based lenders or look at the other advantages, they are really missing an opportunity … the opportunity to grow your company is clearly there with an asset-based lender or a factor and with a bank it very easily could not be. In fact the covenants themselves [from a bank] a lot of times will limit the company’s ability to grow and go into new markets. I think there’s great opportunity out there because if a company is not able to change and go into new markets and diversify, they are not going to be successful.”