I’ve worked with rural counties across the country, and one of most common recurring themes is a hope from elected officials that local ISPs will step up and build fiber and solve the broadband gaps in the area. County officials often beg local ISPs to pursue grant funding. Far too many times, local ISPs are unable to expand to provide what they are being asked to do.
Only rarely have I ever heard a small ISP admit to local leaders the real reason it can’t solve the broadband gaps. The primary reason that ISPs can’t expand at will is the natural limits on financing for growth. I can’t recall ever hearing an ISP tell a County government that they are unable to borrow the needed funding. I think this is because they think it will diminish them in the eyes of the local officials and make them sound like a small business.
The market reality is that every ISP has a ceiling on the amount of money it can borrow. This limit is not set by the ISP – it’s set by lenders. I’ve often been asked by ISPs to quantify their borrowing limit, but it’s never an easy question to answer. When banks make loans, they look at obvious things like the ability of cash flow to cover debt payments, and at the ratio of debt and equity at a given business. There are also a lot more subtle issues involved in the decision for a bank to make loan, like the bank’s own overall equity and cash holdings, the national trend of interest rates, and the lender’s mix of different types of loans. Just like an ISP doesn’t want to publicly disclose its ability to borrow, banks rarely tell an ISP the real reasons they don’t qualify for a loan.
County officials often assume that it’s easier to find the needed funding if part of a project is funded by a grant. If anything, grant funding can make it harder to borrow, because the borrower has to satisfy the future requirements of the grant agency as well as the requirements of the bank.
This problem is not unique to ISPs, and every kind of business has a natural borrowing limit, just like every family has a limit on the amount of money they can borrow to buy a new home. We tend to think that broadband expansion projects are different because they are loans to build long-term infrastructure, but building a broadband network is not a lot different than building a new factory or a new retail location.
One unique category of ISP is startups. These are new ISPs, or ones that have only a few customers. With rare exceptions, new ISPs are unable to get loans until they have somehow self-funded enough to reach a size and a balance sheet that a bank will even consider.
Having a natural borrowing limit is not unique to small ISPs. Altice, which recently rebranded to Optimum, is in financial hot water because it looks like it is facing a huge challenge to refinance its outstanding debt that is coming due in a large balloon payment. One of the factors that convinced EchoStar to abandon the facility-based cellular business was the challenge of borrowing more to meet its existing debt payments.
The only realistic alternative to borrowing for most ISPs is to accept equity funding. Small ISP owners are generally reluctant to accept equity because it means giving up control of the business. One of the biggest benefits of being a small ISP is that the owners can carve their own path and do things their own way. That freedom quickly ceases when an ISP accepts any significant equity funding.
I guess the bottom line of this discussion is that communities have to have a realistic expectation for small ISPs in the area. These companies would probably love to expand and serve everybody, and if they are not doing so, there is a good chance that they can’t raise the funding needed to expand. Very few ISPs are going to say this in public, but don’t read the fact that they won’t expand to mean they wouldn’t love to.
“Only rarely have I ever heard a small ISP admit to local leaders the real reason it can’t solve the broadband gaps. The primary reason that ISPs can’t expand at will is the natural limits on financing for growth. I can’t recall ever hearing an ISP tell a County government that they are unable to borrow the needed funding. I think this is because they think it will diminish them in the eyes of the local officials and make them sound like a small business.”
But they *are* small businesses compared to the big national players that build swiss cheese FTTP. No stigma in that. But being small isn’t advantageous in utility infrastructure that due to high costs favors large scale.
Wholeheartedly disagree with this comment: “The only realistic alternative to borrowing for most ISPs is to accept equity funding.”
Myself and others work for a cooperative lender that works with small rural ISP’s day in and day out. My portfolio is over $600M. Primarily all rural ISP’s.
Not sure what there is to disagree with. The ISPs in your portfolio are all getting debt financing. The statement refers to ISPs who can’t easily borrow or who hit the borrowing limit and can’t borrow more. I’m positive that none of your borrowers has an unlimited credit line.
What lender is that? I might be interested.
I’ve managed to build an ISP entirely on proceeds without any significant debt. We own bucket trucks, vibe plows, skid steers, etc.
I just think it’s a poor assumption.
Same here. 13 years and counting. 100+ towers, 4 fiber pops, a presence in a Data Center. Started with $1,000 cash.
Here’s the deal, until recently, ISPs have been a regular business model. The funding from the early telco/DSL days was a distant memory. Every decision is based on ROI.
So, building out to areas was simply a matter of ROI. Can you drag fiber out to a single farmhouse? no, the ROI is 100 years.
Build to a rural town? Sure, might pencil out, but the high density neighborhood that is closer is a better ROI and any business would choose that to do first. The better ROI builds are infinitely ahead of extremely slow ROI rural builds.
The obvious solution is one I’ve brought up before, but I didn’t invent. Fund long haul fiber with taxpayer dollars down basically any travel corridore. That completely changes the ROI scheme and now these rural areas are relatively cheap. Sometimes cheap enough to build fiber to, but also cheap enough to build modern wireless networks to that can push 1Gbps today.
There is a financial limitation, but it’s not building the actual network, it’s getting access to long haul fiber that is frequently HUNDREDS of miles away from these rural communities and that is an impossible task for a small company.
I should point out that big companies dont fare any better here. Spectrum and Comcast etc aren’t saturating all these small towns. The argument about funding pretty much falls apart when you consider that they big, very well funded companies couldn’t make ROI to do the builds either.
This would be the equivalent of saying that Walmart is well funded enough to pave the road to every potential customer so they could easily drive to walmart. It’s absurd.