Encouraging fleet managers and business owners to spend cautiously is not a tough sell right now: The construction industry in Texas ran out of fat to trim months ago. Company owners managed to save money the smart way (improved efficiency) and the tough way (personnel reductions). Where else can one save while riding out the storm?
One place is in the decision to lease or finance heavy equipment. Your approach could be the difference in saving money on a deal or, in some cases, being able to acquire the equipment you need at all.
Gerald Cook has seen how finance agreements can affect a company beyond the machine(s) being invoiced. In his 20 years as finance manager at ROMCO Equipment Co. he has become familiar with banks, manufacturer-backed finance companies and the hurdles customers face when securing money from both to buy construction equipment.
I posed some questions to Cook to get a better understanding of the system, including the mistakes that will cost you the most and what can you do to prepare to apply for financial help.
Question: What are the most popular options for purchasing equipment right now?
Answer: Financing and leasing are your two basic choices. Financing is popular now due to low interest rates. It’s a good choice if the buyer wishes to own equipment after the loan is paid off. The customer is also able to take depreciation. Leasing is a good choice if they are looking for the lowest possible payment and want to return the equipment at the end of the lease. The lease payments are expensed instead of the customer taking depreciation. Leasing is the most expensive way to go if you wish to own the equipment at the end of the lease. I think the best lease structure comes with a fixed purchase at the end. The customer can see if the equipment is worth the purchase price at the end of the lease. They can then decide to purchase or return the equipment.
Q: Are they popular now because of the current economic situation, or have they always been the normal approach?
A: I don’t think the current economic situation has much to do with which finance structure to use. It has more to do with the customer’s individual needs. These needs may change due to the economy.
Q: What should potential equipment buyers do before seeking financing?
A: They need to have good personal credit, pay their bills on time, and have current financial statements and a list of projects.
Q: What common mistakes do people make that cost them over the term of a loan?
A: The most common is paying their note payments 30 days slow on a continuing basis. The late fees are usually 5 percent of the payment. The finance company’s favorite customer is the guy who pays 30 slow and then pays his late fees.
Q: What are the advantages and disadvantages of using an equipment manufacturer’s finance company?
A: The biggest advantage of using a manufacturer’s finance company is it allows the customer to keep his bank line open for working capital. He can also take advantage of low rates subsidized by the manufacturer. These subsidy discounts are often not available as a cash discount. The only disadvantage I can think of is that the customer will have to provide financial information to the manufacturer’s finance company when their bank would probably already have the information on hand.
Q: When are leases a better idea?
A: Lease ideas are better:
- When a customer is looking for the lowest possible payment for cash flow reasons.
- When a customer is trying to maximize his bonding capacity by keeping debt off of his balance sheet.
- When a customer wants to know exactly what his costs are. He can lease a piece of equipment and include full warranty so his monthly payment will cover all of his cost.
- When a customer has a job that will last a specific amount of time it is often wise to lease the equipment for the same term. When the job is complete he can return the equipment or if he picks up more work he can purchase it.
Q: How creative do people get on payment schedules such as structuring around slower times of year?
A: Winter skips have been very popular for converting rental contracts to sales, specifically for (asphalt) pavers and rollers. In that scenario, the customer rents the equipment all spring and summer to build equity, then purchases at the end of the paving season. He does not have to begin making payments until the following spring.
It’s always best to talk with your own financial advisors, the equipment dealer and regular lending institutions about available financing programs. Some of those programs are more complicated than others, so don’t be embarrassed to ask questions. Make sure the options placed in front of you are explained in terms you understand.
This is about understanding the true total cost to your business and having access to the tools you need to remain competitive.