Weighing Equipment Options

Most grading and excavation contractors use either loans or leasing at some point to finance their equipment. The two options are different in significant ways. Loans usually require down payments and the promise to repay with interest over time. With a loan, you might have to offer fixed assets for collateral, and equipment can be seized in the case of a default. At the end of a contract, the borrower legally owns the equipment.

A lease may be thought of as akin to a rent payment. You have and use the equipment, but may or may not choose to own it when the terms of the agreement are up. Leasing gives you the ability to maintain cash flow and lines of credit as well as the possibility of claiming lease payments as an expense. There also tends to be more flexibility with a lease than a loan, and upgrades to equipment often come in the lease agreement, keeping obsolescence at bay.

But if the risks of obsolescence, depreciation, and the need for upgrades to the equipment are not an issue, a loan might be preferable, especially if simple ownership is the user’s goal.

There are currently a wide variety of options available for equipment financing, despite the many recent months and not-so-recent months of bad overall economic news. Some companies finance equipment themselves for their customers, while others send their customers to finance companies to help them get the equipment they need to get the job done.

Some 80% of large and small businesses in this country still make use of equipment financing to keep their firms operating. Grading & Excavation Contractor recently asked some of those financing firms to comment on what is happening with finance options in the current economy.

During Times When Finance Options Are an Issue
“While our no-to-low interest loans are still our most popular financing alternatives, many more customers are excited about the attractive leasing options that are available today,” explains George Macia, vice president with Doosan Infracore Financial Solutions. “The concept is this: When you’re selling equipment fast in a booming economy, different financing options aren’t an issue. But when things get a little more challenging, customers and dealers are willing to entertain the leasing option and have found it attractive regardless of the economic climate. In terms of any shifts in options, yes, there is much more emphasis on the leasing option and slightly longer terms for traditional loan financing.”

Doosan Infracore Financial Solutions meet the needs of all companies from very small to very large, according to Macia. It has the ability to customize financing options to meet the individual needs for any organization.

“The most important thing is that our finance programs are operating almost the way they were prior to the credit crisis,” adds Macia. “We are not limited to how much financing we can provide, and we can offer it to any qualified Bobcat customer. It’s not difficult to get financing, and our loan approval rates are almost as high as they were prior to the recession. Financing is available; we have very few restrictions, and our portfolios are very healthy.”

Whether the customer is interested in a loan or a lease, Doosan has the same risk acceptance criteria for loans that it has for leases. If you qualify for one, you qualify for the other, according to Macia.

Learning the Customer’s Needs
Leasing may appeal to customers who want to take advantage of lower payments typically associated with leases, who have a job with a specific time period (for example, 24 months), and who want to match the lease term with project timetable or who want to mitigate the risk associated with future used-equipment values at trade-in time. In addition, many customers align lease terms with the time at which maintenance costs tend to accelerate toward the end of the equipment’s life cycle. If a customer needs equipment on a short-term basis for a specific job or contract, renting is a strong option because the equipment may simply be returned after its use.

Volvo Financial Services, Volvo Construction Equipment, and Volvo Rents Inc. offer a comprehensive lineup of loan and lease options, rental purchase agreements, short-term rentals, and other special offers. “We work as a team to understand the customer’s specific business objectives and select the finance or lease plan that best meets those goals; the result is a solution that is tailored to the customer’s needs,” says Mike Rankin, vice president with Construction Equipment Finance for the US division of Volvo Financial Services.

Volvo has seen an increase in leasing over the past three years. “Low monthly payments, increased cash flow, improved life cycle cost and the overall flexibility of leases offer very attractive benefits to customers,” says Rankin.

“We encourage customers of all sizes to develop a relationship with their Volvo dealer, who can talk with the customer about all equipment, financing, and business needs, and ensure those needs are addressed with a total solution package. Volvo Financial Services frequently offers programs tailored to specific market segments or equipment types, and the Volvo dealer is a great source of information.”

As a captive finance company, Volvo Financial Services brings in-depth knowledge of the manufacturer’s equipment to the deal, and offers a packaged approach to financing that includes the equipment, financing, and other support products such as insurance and extended service agreements. This makes it easy to put the equipment to work, according to Rankin.

“Volvo Financial Services has remained committed to financing and supporting the sale of Volvo products throughout the business cycle,” says Rankin. “I believe there is an increasing need for customers to replace aging equipment, and we’ve seen an uptick in sales and finance activity in the first half of 2011.

Toward Growth in Leasing
Loan financing continues to be the most common request received by Terex Financial Services; its three-year, 0% interest loan on particular Terex products is by far its most popular finance promotion, according to Tony Rust, director for Terex Financial Services–Construction. “I feel that customers’ finance behaviors have not changed for many years; however, access to credit has been increasingly difficult, which is why Terex Financial Services has expanded its financing offerings to best serve customers. Terex Financial Services works with all customers, small to large, to develop the best financing solution to meet their particular business needs.”

Terex Financial Services offers a comprehensive range of finance and leasing solutions worldwide, structured to complement customers’ cash flow and budgets, such as commercial lease and loan structures, including seasonal, deferred, and step-up payments. “We work tirelessly to provide credit access to all of our customers,” says Rust. “We also strive to provide low-rate financing options across the Terex Construction product lines that are well below market interest rates.”

Credit is still tough to come by in the open market, according to Rust. This has made Terex Financial Services a critical function of the sales process. Terex Financial Services’ credit capability is well above the norm, and it allows customers access to credit that they otherwise might not be able to access. The key to credit access is that a customer has prior credit history for comparable credit amounts and has demonstrated a consistent ability to make payments on time throughout this tough economic environment.

Terex Financial Services professionals know the importance of working closely with Terex distributors and customers to understand their unique business challenges as well as their financial goals and requirements. “Obtaining financing is often a time-consuming task, so Terex Financial Services works hard to provide a reliable, flexible, and responsive service,” adds Rust.

“The Terex Financial Services team assists in all areas of asset management, from the analysis of future equipment values through the disposal of used equipment. Again, the key is to establish a positive and lengthy credit history and to have available updated financial statements throughout the year.

“Many businesses in the construction industry still prefer to own their equipment, so leasing has been slow to gain traction. We continue to offer leasing as a great financing option and encourage customers to consider it when making their purchasing decisions. Approximately 10% of our customer base has taken advantage of our leasing options in the past, and we expect that trend to continue in the future. Financing will always be a critical piece of the puzzle in selling Terex equipment, especially as we work through difficult economic times.”

Maneuvering Well Across Tough Financial Times
Takeuchi offers three product lines: a compact track loader, a compact excavator, and a compact wheel loader. The company’s finance arm is Takeuchi Financial Services. In comparison with the period prior to September 2008, its numbers of equipment finance transactions now are equivalent and trending in a positive fashion moving forward, according to John Vranches, national sales manager.

“This is in the areas of both credit approvals and folks inquiring about purchases,” says Vranches. “Things remain positive right now, and, even considering what we’ve all been through, our finance department will still look outside the box. We want to establish a relationship with someone who’s getting into the business and to encourage that.

“Certainly there are parameters that finance companies will follow. But I believe those who think creatively to enable a potential customer with some financing will build a long-term partnership; when you help someone into the business, they’re always going to remember you. It’s not always the easiest, but we like to say we’ll take time and do whatever we can to develop a new partner.”

Over the last 18 to 24 months, smaller equipment has been more fluent in the industry than the larger iron, with many more sales opportunities, according to Vranches. “It’s been tough on everybody, but I think that we didn’t have the toughest part of it considering the smaller equipment we sell. We’ve seen a lot of versatility in our line and new market segments including municipal, governmental, road building, and many different types of applications. I think plenty of folks are buying machines who haven’t in the past.”

Back around 2005, Vranches, leasing was a very aggressive option in the purchaser’s eyes. There were year-end incentives, tax incentives, and the ability of people to keep machines off their books through leasing in addition to the capability to always have a new fleet with the option to turn every two to three years.

“Now I think that trend will continue to evolve back toward leasing with that option becoming stronger in the future within the next couple of years, with more requests on leasing. It’s certainly becoming more of an option now.”

When You Are New in the US Equipment Market
Liugong Construction Machinery USA, of Houston, TX, started distributing products in this country two or three years ago. The company offers wheel loaders, hydraulic excavators, compactors, skid-steers, and mini-excavators in its lineup. It is at the stage where it’s building a distributor network, according to Fred Ridenour, general manager of business operations. “We’ve also worked hard to put together financing with a third-party finance company, De Lage Landen, but are in the early stages of that, too.

“Our business right now is doing dealer development and dealers building rental fleets and making a name for ourselves,” says Ridenour. “As a foreign manufacturer, you bring your products to the country and then provide the type of services that go along with selling that. You must make accommodations for wholesale, retail financing, and rental. Liugong is one of the prominent manufacturers in China and is a full-product-line company.”

This company has probably invested the most money in American workers and American construction people in staffing in the US, according to Ridenour. It also has a program to make sure the work force is learning English and trying to become a more western supplier. It is the first Chinese company to build a manufacturing plant in India, and it is working on some relationships with Europe for manufacturing as well.

Options to Fit Each Situation or Company
Some manufacturers, for whatever reason, may choose not to offer financing, and in some cases they will ask a company such as GE Capital to be their de facto lender. In other cases, companies don’t make any arrangements at all, and the end buyer is free to go find financing all on its own. GE Capital may be thought of along the same lines as Wells Fargo or Bank of America, which also have large commercial lending and leasing arms.

GE Capital has plenty of liquidity available, according to Kristi Webb, chief marketing officer of GE Capital America Equipment Finance, located in Irving, TX. “GE Capital produces a report on the construction industry, looking at all kinds of data and statistics. Credit remains available for all sorts of end users involved in many varied construction projects.”

The company’s business so far this year in the construction world is up. They’ve grown throughout 2011, 25% year-over-year growth, according to Jody Green, vice president at GE Capital. “We’re excited about it. There’s a lot of opportunity for us to continue to add value. We have a national geographic footprint with a team dispersed across the country.”

GE Capital’s Rebate Lease program is based on the usage of the equipment. If customers don’t use the equipment for as many hours as expected, they get a rebate. For example, if a $300,000 piece of equipment is allowed 10,000 hours of usage but is only used for 8,500 hours, and the agreed per-hour rebate rate is $8, the customer is paid a rebate of $12,000. Likewise, if a user uses the equipment 11,000 hours under the same agreement, the overuse charge is also $8 per hour, and the customer has a charge of only $8,000. The industry average is $30 per hour and the overuse charge in that case would be $30,000, or $22,000 more than if the GE Rebate Lease is used.

GE Capital also has a comprehensive underwriting group. It structures transactions from a risk perspective that work for the company to meet the needs it has for its equipment acquisition, and to have a wide range of companies with which to do business. GE Capital has had a close relationship with Ritchie Bros. Auctioneers for some 20 years.

“Ritchie Brothers sell a lot of the assets that we have,” says Jeremy Thomason senior relationship manager, GE Capital, vendor finance. “That relationship has grown recently into a finance opportunity whereby they recognize that all the people that come to their auctions need quick and easy finance solutions for the equipment at Ritchie Bros. Auction.”

That has manifested itself into a program GE Capital is partnering with the company that will allow it to provide virtually instant credit and financing opportunities at the pace of an auction. It’s doing financing for heavy equipment, smaller equipment, earthmoving equipment, and all kinds of equipment at the Ritchie Bros. sales.

“We’re partnering with them in a way that allows that equipment to get back out moving dirt very quickly,” says Thomason. “One of the challenges that the industry has is the supply, and that’s something an auction helps solve because the equipment is readily available. That may or may not be the case whenever you’re trying to buy something from a dealer and there might be lag time involved.

Need Equipment Fast?
Ritchie Bros. Financial Services has built a great relationship with GE Capital, according to Karl Werner, vice president of operations with Ritchie Bros. Auctioneers. “From the moment we first approached GE Capital this past spring, they’ve demonstrated their willingness and commitment to provide the best service imaginable to us and our customers. It was clear to us from the beginning of our negotiations that they were bringing the right people to the table—talented, responsive and easy to work with.”

Ritchie Bros. Financial Services has partnered with a number of leading equipment finance providers like GE Capital to bring fast, convenient financing options to customers of Ritchie Bros. Auctioneers. GE is one of its key anchor lenders, but there are a number of other national lenders it works with as well, such as Direct Capital and Capital One Equipment Leasing and Finance in the US, and CIT Canada and National Leasing in Canada.

A unique service Ritchie Bros. Financial Services offers to customers bidding on equipment at Ritchie Bros. auctions is the renewable, 90-day pre-approval term. Ritchie Bros. customers can use pre-approved financing at any Ritchie Bros. auction in Canada or the US within the 90-day period. If they don’t use their full financing amount at the first auction in which they participate, they can use the balance at another auction within the 90-day period. Plus, the term can be renewed at no cost.

Since the Ritchie Bros. program was only launched on July 1, it’s early to gauge any purchasing trends. “That being said, we have noticed good finance approval rates to date, in addition to an increasing number of applications in the past two months,” says Werner.

“Bidding and buying at a Ritchie Bros. unreserved auction is easy—especially if you follow a few steps before auction day. Find the equipment or trucks you’d like to buy. Rbauction.com is the best place to start looking. There’s always a huge inventory of equipment (we sold more than 277,000 items in 2010 alone). You can see detailed equipment information, including up to 50 high-resolution photos with most items, to help decide what you want to bid on. Create a free account on our website, and we can send you information about new items added to inventory. For added confidence, visit the auction site before auction day to test, inspect, and compare items.”

The company displays equipment in its secure, fenced auction sites and makes it available to inspect in the weeks before the auction. Customers can decide what they’re willing to pay for something that interests them. With a free account at http://www.rbauction.com, individuals can access the selling prices from the past two years of Ritchie Bros. auctions (over half a million items), which helps people understand current market prices.

“Get your financing in place,” adds Werner. “Come prepared on auction day with pre-approved financing, and you’ll know how much you can spend. People tend to feel more comfortable and relaxed if they have everything in place beforehand, and don’t have to make last-minute decisions.”

Ritchie Bros. auctions are open to the public and unreserved. To buy something, customers must register and bid—in person, online in real time, or by proxy (with Ritchie Bros. bidding on the customer’s behalf). Every item sells on auction day. If the individual doesn’t register to bid, the opportunity to buy is missed. Auctions are strictly unreserved, with no minimum bids or reserve prices. Ritchie Bros. doesn’t set the prices; the bidders do.

“Applying for financing is quick and easy—you can do it by phone or on our website,” explains Werner. “Most applications are approved on the same day (we can even do it on auction day), but it’s always better to apply a few days before the auction. Pre-approved auction financing is obligation free, so if you don’t use it, there are no penalties. It makes sense to apply and get pre-approval so you have your financing in place on auction day, just in case you want to use it.”

Author's Bio:

Peter Hildebrandt writes extensively on engineering and scientific subjects.