One of the top challenges for many smaller security dealers is securing additional funding. And while banks traditionally are the first institutions that come to mind for business owners, many security dealers have an alternative option: their third-party central station provider.
Many central stations offer their dealers “financial services” — be sure to check each of the featured providers in our third-party central station monitoring provider contact listings to see which ones offer them.
“Dealers will take advantage of central station funding programs to cover their account creation costs and the associated overhead on new contract loans,” says Michael Bodnar, President of Security Partners LCC of Texas. “When receiving funding for bulk account acquisitions, the dealer will often use the revenue to recapitalize, take out cash, or to finance additional acquisitions or expansion. For most dealers, monitoring contracts are their primary equity. Selling their accounts is a short term solution, while loans, as an alternative, can provide critical cash flow and allow them to build long-term equity.”
Central stations offer these services either in-house or via a third-party banking provider. Benefits range from reduced taxes to higher multiples if and when you decide to sell the business. “Third party central stations will provide financial services to support their dealers within the framework of two funding options — either Contract Acquisition, which provides funding for purchase of new accounts (contracts) and the bulk purchase of aged accounts (contracts); or a Contract Loan Program, which provides an RMR multiple advance as a loan to the dealer for the creation of new subscriber accounts, or the bulk acquisition of existing accounts,” Bodnar explains.
“Typically, a dealer must sell their contracts to get funding. While this might help the dealer with the immediate need for capital, it comes at a high price because they are sacrificing long-term equity in their business,” says Jim McMullen, President & COO of COPS Monitoring.
McMullen points out that COPS believes that owning its own accounts would be a conflict of interest with its dealers, thus, they do not purchase accounts directly. Instead, the provider has relationships with industry funding companies. “The application process and requirements from banks and other lenders can be tedious and the options are limited,” McMullen says. “Funding from our partners is easier because the process is geared specifically toward alarm dealers.”
“Dealers receive funding for acquisitions or loans based on the multiples of an individual subscriber’s contracted RMR, or for the total RMR value of the existing bulk account portfolio being acquired,” Bodnar says. “As an acquisition, the acquiring party or buying-dealer assumes full control and ownership of the account base. As a loan, the central station or lender will assume billing of the subscriber account over the term of the loan.”
Whether dealers utilize these services via their central station provider or a lending institution, many of the same criteria applies. Get a better idea for what lenders are looking for in this article from Capital One: www.securityinfowatch.com/12197092 that appeared in SD&I’s annual Money Issue this year.
In Security Partners’ funding program, dealers retain ownership of their accounts for the short and long-term. “Our funding program ensures that our dealers are able to service their customer, and also upgrade a subscriber’s system or install additional security devices with an established line of credit for the subscriber.”
COPS has traditional funding options where a dealer can get top multiples by selling monitoring contracts, as well as loan programs that allow dealers to use their contracts as collateral while retaining ownership. Dealers can start and stop the program whenever they need capital and there are no minimums, which means they can fund a single account or a group of accounts. “The process is very streamlined and dealers can get the funding they need very quickly,” McMullen adds.
Paul Rothman is Editor in Chief of Security Dealer & Integrator (SD&I) magazine. Access the current issue and archives at www.secdealer.com.