owning the machine - construction equipment finance options
TRANSCRIPT
OBJECTIVES
1. Trends in the lending industry
2. Borrowing options available to you
3. What credit analysts are looking for so you receive the right amount of money
4. The importance of managing your cash flow
5. How leases can be structured
LENDING INDUSTRY TRENDS
1. The time to borrow is now
Many competing lenders
Low interest rates
LENDING INDUSTRY TRENDS
2. Shop until you find the perfect match
Borrowers are owner/operators, small companies or large companies
Lenders range from ‘The Big 5 Banks’ to independents
Align yourself with the right lender
LENDING INDUSTRY TRENDS
3. Getting a financing approval
Deals judged on credit history vs. financial statements
Good financial standing = good rates
Some lenders still have an appetite for riskier investments
YOUR BORROWING OPTIONS
1. Operating Loan/Line of Credit
a) Similar to a credit card or personal line of credit, except for your business
b) Best for regular operating expenses needed to be paid in the short term
Pros
Pre-approved source of lending to finance the costs of a borrower’s current assets (inventory and account receivables)
Only pay interest on the credit you’ve used rather than the total authorized borrowing amount
Cons
Potential high administration
Lender reporting requirements and covenant compliance issues
Potential additional borrowing costs
YOUR BORROWING OPTIONS
2. Term Loan
a) A borrowed sum of money, typically used to assist with the acquisition of capital assets
b) The repayment of the loan is over a set and extended period of times (usually years)
Pros
Helps facilitate the acquisition of a business’ fixed assets
Preserves working capital and better matches the value of the asset with its cash cost
Builds equity through ownership versus rental
Cons
Higher upfront and monthly costs
Less buyout and trade up options
Less repayment structure options
YOUR BORROWING OPTIONS
3. Capital Lease
a) Title of asset is with the lender but borrower repays all or the majority of the cost of the asset over the life of the lease contract
b) Title then transfers back to borrower at end of contract for a nominal charge.
Pros
Preserves cash flow – more capital for other business expenses
Flexible payment plans
Down payment not always required
Flexible end of lease agreements with low price buyout options
Cons
Less flexible tax benefits relative to operating lease
YOUR BORROWING OPTIONS
4. Operating Lease
a) Equipment title remains with the lender and the borrower can pay out a term-ending residual and transfer ownership to them
b) Or borrower can finish lease contract and the title of the asset with the lender
Pros
Preserves cash flow – more capital for other business expenses
Low regular payment amount
More end of contract options
Potentially write off payments as a rental expense
Cons
Only used for certain types of equipment
Short supply of lenders
Can be difficult to meet qualifications
YOUR BORROWING OPTIONS
How do you choose?
1. Life of Asset and Life of Debt (Life of Debt should never exceed Life of Asset)
2. Tax implications: Short Term vs. Long Term
3. Available cash must meet repayment obligations
APPLYING FOR CREDIT
Credit Analysts considering the following when deciding how much money to lend:
Credit rating reports
Time in business
Type of asset
Dollar amount
Requested term
The equipment dealer
Financial statements, particularly
Debt-servicing capacity
Working capital
Leverage (Debt vs Equity)
IMPORTANCE OF CASH FLOW
What is Cash Flow? Cash that comes into your company from business revenues and is need to pay all the day-to-day expenses including debt repayment and unfinanced equipment acquisitions.
Why Cash Flow Management is Important Short term bills need to be paid (suppliers, employees) and available cash is
necessary to meet these obligations
Number one reason why companies fail
If money going out is greater than money coming in your business will eventually find trouble
IMPORTANCE OF CASH FLOW
Cash Flow Management Tips
Avoid using cash for long-term assets
Structure your business so your cash inflow is greater than its outflow
Cash reserves are especially important to seize opportunities or
mitigate unexpected events
LEASING BENEFITS AND FEATURES
1. Flexible Payments
Monthly, skip, semi-annual, or annual payment options
2. Sale-leaseback
Sell your purchased equipment for fair market value to a finance company and then lease it back over a fixed payment period
Frees up cash flow
Available only for equipment purchased within the last six months
3. New and used equipment
Lease equipment that’s up to 15 years old
4. Flexible End of Lease Options (capital leases)
Fair market value, 10% buyout, Skip Lease, Stretch lease
THANK YOU FOR WATCHING!