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9BLOC Organizers Seek Innovation and Diversity in Funding the Next Big U.S. Pallet Pool
Organizers behind the new 9BLOC pool comment about the economics of its system as well as the various funding strategies and issues currently being considered.
By Chaille Brindley
Date Posted: 9/1/2012
Developing a large pool of white-
wood block pallets is no small
endeavor. It takes a large network of pallet companies and customers willing to take a chance on a fledging organization. But the upside is tremendous. That is exactly what the organizers behind the new 9BLOC pallet pool are hoping to achieve. And one of the primary areas of concerns for many looking to get involved is the funding and financing of the pool.
People naturally ask, “How is the pool going to be funded?” And that is the $250 million question. Or maybe it is better to think of it as the $250,000 question answered 1,000 times. Unlike previous pallet pooling efforts in the United States, the organizers behind 9BLOC are not looking for a few large sugar daddies to fund the development of the pool. They want to develop a network of funding options so that pallet companies can select from a number of different options.
John Swenby, president of 9BLOC said, “We really do feel that we have vetted ourselves pretty well from a financial perspective. We are going after pools of money, not one or two bigger investors.” He added
The organizers behind 9BLOC have developed a detailed business plan that has been vetted with experts from Wall Street and the banking industries. This business plan covers the details of the economic model of the pool as well as outlines ideas for some funding options. Participants in the 9BLOC pool have access to this business plan as well as consulting from others in the organization that have been able to get financing and setup private networks for customers.
Steve Mazza, vice president of 9BLOC, has been able to setup and finance cost per trip networks for some major consumer goods companies. Mazza said, “The beautiful thing about 9BLOC is that each company will find the best funding source for its way of doing business.”
Possible sources of funding include: current lenders, traditional banks, small private equity investors, investment banks, venture capitalists, revolving lines of credit, leasing companies, crowd funding and industrial bonds.
One of the unique options being explored is local loans that are backed in some way by a large national lending institution. The larger entity would pre-approve the 9BLOC concept and provide some degree of financial security to the local lending institution. Mark Hoffman, president of Larson Pallet & Crating and a 9BLOC participant, said, “The advantage of this approach is that you already have under writing approval from a major lender and you don’t need to sell the concept of the program.”
Before joining the pallet industry, Hoffman had years of experience in management consulting and has a degree in finance. He added, “9BLOC is designed to be open and flexible for entrepreneurs to be innovative without a restrictive corporate structure.”
The Economics of Pooling
The basic economic theory behind pallet pooling is not new. The European pallet industry has made it work for them for years with its EPAL pool as has the Canadian Pallet Council in Canada. Also, CHEP and PECO have already shown the viability of pallet rental systems in North America. Brambles Ltd., the parent company behind CHEP, regularly records 17-20% profit in various parts of the world. So the economics of pooling are a proven reality as long as you can reach critical mass and reduce logistics costs.
Developing the size of the pool will take some times because millions of pallets can’t be built over night. But the 9BLOC network should have the capacity to ramp up faster than any other pool in history. When it comes to logistics, the 9BLOC partners should be able to do better than the major rental providers. Joe O’Brien, a leader within the 9BLOC organization, said, “We have a group of pallet industry leaders that through their longevity have established their viability.”
He added, “We provide the infrastructure for our competitors; we are doing these key functions already.”
The 9BLOC system will include the same basic cost and economic factors as other systems. The main difference is that it will have more players to help reduce lost pallets, repair pallets and handle logistics concerns. Some typical cost factors in pooling include: pallet acquisition, trips per year, damage and repair costs, logistics and transportation fees, and financing/loans, etc. Revenue inputs include the cost per trip, transport and use fees. Since these pallets can also be bought and sold, there is the potential for revenue from sales after the end of each pallet trip.
Repair rates will increase over time. But 9BLOC anticipates its overall pallet longevity will meet or exceed the major rental providers. Mazza said, “Every single pallet is inspected and repaired back to its original standard not to some arbitrary number to meet a financial requirement.”
Rental providers typically obtain about 3-4 pallet turns per year. Mazza said that 9BLOC hopes to eventually be able to get faster turns thanks to its tracking system and other market factors.
The economic models behind the 9BLOC system suggest that the future is bright. O’Brien said, “I am very optimistic that 9BLOC can work from a financial perspective. I believe those who are participants have learned the model and have confidence in it.”
The pallet industry is moving forward with the 9BLOC system. Licensed and inspected pallet manufacturers are currently producing and marking initial runs of 9BLOC pallets. Hoffman said, “It’s kind of a chicken and egg situation. Everything is about ready to go – we are waiting for Costco or major manufacturers to pull the trigger.”
Figuring out the finances starts with discussing the options with any target customers to see what model works best for them. Ideally, the best customer is any company with a short use period, limited geographic spread of the pallets and willingness to help fund or buy the pool. You will want to figure out the number of days that a customer expects to need a pallet. This will impact the negative cash flow impact for each day you need to finance a pallet. Key factors are the damage rates, turn ratio and logistics costs involved in repositioning pallets.
One issue still being resolved is whether or not major lenders are willing to view the pallet as collateral for the loans. Hoffman explained that initially lending sources seem reluctant to make loans without outside collateral at least until the 9BLOC pallet pool reaches a larger size. He added that he thinks lending institutions will eventually come around and allow the pallet to be viewed as collateral for loans used to build the pool.
Developing your own ability to produce and repair 9BLOC pallets starts with joining the organization and getting inspected and approved to be an active pallet producer or repairer. You will need to keep accurate records to certify that you are in compliance with all the rules and standards required by 9BLOC.
But the costs to fund the growth of your part of the 9BLOC pool may not be as great as you first think. Mazza explained, “It costs under a dollar per month to finance a pallet for three years.”
Changing Landscape and
Rules of Financing
The federal government has recently passed some new rules and made changes to encourage even more lending and financing to spur job growth and business investment. Most notably, the Jumpstart Our Business Startups (JOBS) Act has made it easier to obtain smaller amounts of financing while reducing the paperwork burden on the process.
President Obama signed the JOBS Act into law earlier this year after a bipartisan Congressional group passed it to spur economic growth and funding for small to mid-sized businesses. Traditionally, regulations have limited the ability of these companies to solicit investment from only friends and wealth, accredited investors. The new law also rolls back some auditing and filling requirements in the Initial Public Offering (IPO) process.
Some critics are concerned that the changes could make it easier for fraud and unscrupulous individuals to prey on small, less-sophisticated investors. But there are some safeguards in place to limit exposure and require some degree of oversight and vetting.
One change the JOBS Act makes is to allow the advertising of Regulation-D/Rule-506 offerings to be publicized. These are private deals where you don’t have to register with either the federal or state governments. Previously, you could only offer these deals to those you already had an existing relationship with or knew. So, you can now raise as much money as you want with a Rule-506 investment as well as advertise it to the general public. But you can still only accept money from accredited investors for Rule-506 transactions.
Another major change allows even small investors to get into the process. The JOBS Act now allows companies to raise up to $1 million from anyone and can advertise the opportunity on the Internet. The law does require that the transactions go through certain government-approved portals that are tasked with vetting opportunities and protecting small investors from fraudsters. The process of raising money from a large number of small investors over the Internet has become known as crowdfunding. Previously, it was done primarily for small projects or ventures, such as bands looking to make a new CD or a non-profit enterprise.
Some business publications have speculated that the JOBS Act could open up a whole new investing boom via crowdfunding once the Securities and Exchange Commission (SEC) writes the rules to finalize the process. It appears that companies still must file certain information with the SEC, such as a list of officers and major shareholders, a business plan, description of projected use for proceeds and basic financial statements.
The SEC has until 2013 to develop the process although crowdfunding portals are already beginning to pop up including: Wefunder,Crowdfunder and Motaavi. These portals are not allowed to begin accepting investments until the rules are finalized next year.
Will 2013 become the year of crowdfunding? Only time will tell, but it could be a valuable way to find investors, especially if you aren’t big enough to go the traditional routes.
The JOBS Act also raises the limit a company can receive under Regulation A of the Securities Act of 1933 from $5 million to $50 million. The new rules also exempt these transactions from state registration for securities sold to qualified purchasers. These changes could reinvigorate Regulation A as a meaningful vehicle to raise equity funding.
Hoffman said, “I don’t think the JOBS Act has done much to help anyone yet.” He suggested that could change with growth in crowdfunding or other options.
Hoffman added, “Crowdfunding could be a growing source of funding, but it usually tends to be smaller amounts of money, like a couple truckloads of pallets.”
O’Brien said, “In past, I have seen some government programs through the Small Business Administration that have been very helpful.” These program help companies borrow at a lower rate or obtain more financing than they would usually qualify for since the loans are backed by the government.
O’Brien explained that not all government assistance is as good as advertised. He said, “Some government programs become more cumbersome than they are worth due to the hidden cost of administration involved.”
Regardless of your view, you need to be aware that changes are taking place all the time in funding regulations and practices. Also, now is the time to get in on the brewing 9BLOC pool if you want to develop that part of your business.
O’Brien said, “I see this as an opportunity to invest in a new market share.” He stated, “Those who complain about spending too much capital to build the pool, I want to ask if they have given up on their markets. This is a revenue and investment opportunity.”
Even though Larson Pallet & Crating, which does very little 48x40 business any more, may not benefit a lot from the 9BLOC initiative, Hoffman said, “Supporting 9BLOC is the right thing to do for our industry. I know there have been skeptics out there. But if anything is ever going to take off and create value for the industry, 9BLOC is it. Once it gets going, it will take off faster than people expect.”