It appears that construction equipment sales and loan volumes will decline this year in the United States as a whole, despite the 2008 Economic Stimulus Act, which gives contractors tax breaks on new equipment purchases.
“The construction industry in the United States has seen a decrease in unit sales of new equipment through the first quarter of 2008,” says Bill Connolly, manager of finance integration at John Deere Credit. “And while our finance market share has remained strong, the reduction in equipment sales also means a reduction in equipment financing opportunities.”
On the other hand, construction is a regional game, points out Ron Riecks, general manager of Wells Fargo Construction, a division of Wells Fargo Equipment Finance Inc. “Some areas of the country are going to stay relatively flat. Others are going to come through just fine. Non-residential construction continues to prop up all of construction spending while the housing market stalls. For that reason, we are optimistic that equipment financing in 2008 at the national level will remain at or near 2007 levels.”
Sales Up, Sales Down
“Our sales this year are about 20% down,” says Jeremy Daniel, general manager at RDO Construction Equipment Co., Tucson, AZ. “We’re ending our housing cycle, and we’re going to start a road and bridge cycle. That will take six to 18 months to start. The Southwest is going to be slow for another six to 18 months.”
Daniel said one of RDO’s largest customers blames the slowdown on the fact that this is an election year. As a result, government agencies are slow to release money for roads and bridges. “I recall the last election, and the same thing happened,” says Daniel. “The government drags its feet on releasing new money.”
The Economic Stimulus Act won’t stimulate spending if contractors don’t have work in front of them, Daniel says. “They won’t spend money unless they feel like they’re going to make money,” he asserts. “Why spend $300,000 on a new loader if you don’t have a backlog of work to support it?”
At Martin Equipment of Illinois, equipment sales through the first quarter were running ahead of 2007. “We aren’t seeing the recession that the East Coast and West Coast are having,” says Joe Dalton, Martin’s store manager in Rock Island, IL.
He says the Economic Stimulus Act has in fact stimulated sales. “Yes, more contractors are buying equipment because of the stimulus act,” says Dalton. “And they usually finance through John Deere Credit, because the rates are subsidized by John Deere. They get a lower interest rate than they could get at a financial institution. The manufacturers are all subsidizing interest rates on new equipment.”
Sound Lending Practices
While some equipment lenders have been affected by the national credit situation and have had to pull back as a result of losses sustained in the real estate market, other captive finance houses and institutions have not been affected.
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Photo: Atlas Excavating |
| Deciding whether to buy, rent, or lease equipment largely depends on one’s need for equipment and the length of time for which one plans to use it. |
“We don’t participate in the real estate or mortgage business,” says Connolly. “Our lending practices are sound, and as a result, we have not had to change them. It is fair to say that the downturn in construction has impacted many contractors in terms of there being less work available. That equates to more contractors bidding on fewer jobs at lower profit margins.”
Whether a contractor pays cash for equipment or borrows money is a case-by-case decision, says Connolly. “Factors such as required down payments, the amount of the monthly payment, cash on hand, and tax implications must all be taken into account when making a buying decision. Our field sales staff has a great deal of expertise in helping dealers and customers determine the method of acquisition that best fits a customer’s needs.”
Connolly says Deere has seen an increase in equipment leasing this year compared with last year at the same time. Again, that is an individual matter that depends on the contractor’s backlog of work, cash flow, and tax situation.
Gradex Inc., a large earthmoving contractor based in Indianapolis, recently used bank financing to purchase eight used pieces of equipment from Interstate Machinery Co., a local dealer. The equipment was not purchased for any certain project, but Chief Financial Officer Kyle Wietholter reports that he has “a decent backlog of work,” including two projects for the Indiana Department of Transportation.
To obtain the financing, Gradex sought quotes from a short list of six providers—three banks and three finance houses, including Wells Fargo. The range in interest rates was close to 150 basis points, or 1.5%, says Wietholter. Two of the banks offered higher interest rates than the other providers, but the one local bank had the lowest interest rate.
“The bonus depreciation [in the 2008 Economic Stimulus Act] is a plus for us,” says Wietholter. “We’re going to need the equipment. The Stimulus Act played a part in the decision, but it was not the deciding factor.”
“We usually finance equipment,” he says. “We will do an operating lease now and then. It’s an off-balance-sheet rental.”
Atlas Excavating of West Lafayette, IN, also polls a group of finance providers when seeking equipment financing. “I have a group of banks and finance companies that I usually use, and they are very, very responsive,” says Atlas controller Jim McGee. “Before we do the quotes, we find out what we’re going to buy. The people who finance it want to see the purchase order. I can usually get responses in three or four days.”
The finance houses that McGee uses include FCC Equipment Financing, GE Commercial Finance, Wells Fargo Construction, and Citi Capital, a member of Citigroup.
He also polls the manufacturer’s captive finance company, depending on which brand of equipment he’s buying. That could be the finance arm of Caterpillar, Case, Volvo, John Deere or another.
“We have a preference for the best numbers,” says McGree. “As contractors, we’re accustomed to being awarded the project based on the low bid. But with financing, we don’t always take the low bid. There can be other considerations. With some houses we have pre-approved credit, and I can get the deal done faster. Others have conditions, such as prepayment penalties.
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Photo: Atlas Excavating |
| Contractors should factor in the total cost of ownership of a machine and how many contracts are currently scheduled when determining equipment needs. |
“We’re looking for the best terms,” says McGee. “But personal relationships count for something, too. Not a week goes by but we hear from some broker or finance company that wants to be included in our short list of finance providers. I always tell them that I have a group that is very responsive, but if somebody ceases to be responsive, I can consider somebody new.”
Business is good at Atlas. “We came from last year into this year with a very good backlog,” says McGee. “But the bidding numbers seem to be very tight. I think other states don’t have as much work as Indiana, so we’re seeing bidders from other states come here looking for work.”
Bonding and Liquidity
Bonding companies look for contractors to have sufficient liquidity to handle their projects, Riecks says. In a best-case situation, a contractor can use a revolving line of credit to borrow a large amount of money and bank it just as a quarter ends—to show liquidity to the bonding company. Then on the first day of the new quarter, perhaps the contractor can pay off the loan.
That way the contractor reduces his interest expense, by borrowing for the minimum amount of time. “By using a revolving line of credit and by using your cash, you can reduce your annual interest expense,” says Riecks.
“There is no credit crunch at Wells Fargo Construction!” says Riecks. “The US economy is facing some uncertain times, but we want people to know that our loan window is still wide open. Plus, the Federal Reserve has made several aggressive interest rate cuts lately. So for many contractors, now is an excellent time to look at refinancing their equipment.”