Easy money

At this juncture, capital for construction equipment and transport vehicles is readily available. While this is a seemingly good news situation, it can also create a risky situation. Whether you are an owner/operator looking to purchase a used truck crane, a large transport company with more demand for heavy haul services than fleet available, or a crane sales operation needing more product to sell, determining how to achieve the best finance package available can be a complicated process.

ACT assembled a “virtual” round table to discuss crane and transport vehicle financing in light of strong demand and an “easy money” market. Our four round table members were: Arnold Goldberg, senior vice president and general manager construction transportation division, Center Capital Corp.; Harry Fry of Harry Fry and Associates; Jay Buechler, customer finance manager, North America, Manitowoc Crane Credit; and Tim Pratt, executive vice president and chief sales officer for CIT Construction.

With the market for new cranes very good, what are the major issues in terms of securing financing?

Buechler: In today's market, where capital is readily available from a wide variety of sources, the primary issue we see is competition on rate. Our customers and dealers have seen their balance sheets and profitability improve significantly over the last two years, and financing sources all across the spectrum are hungry for assets, so they are competing hard to book deals with crane users. My expectation is that as the market turns tougher (hopefully not soon!), we will see many of what I call the'easy money' sources of capital retreat from the market, leaving the long-term players to provide financing when it is most needed.

Fry: For new cranes, as always, financing is based on the credit of the customer. Over the past five years, credit parameters have tightened. Today we need to bring our lenders a company with established time in business of at least three years, preferably five; a good comparable credit reference; profitability in the company; and some net worth in the company. Even with a company that meets all the criteria, we are still seeing our credit analysts requiring some type of down payment- 10% being the norm. In the past, we were able to get our customers 100% financing on most requests but now the lenders want to see some type of participation in the purchase from the buyer.

Goldberg: I think the major issue is making certain you find the right lending partner. Finding a funding source that is willing to structure a transaction to take into considerationan attractive cash flow payment as well as an attractive rate is essential. Because equipment prices are increasing so rapidly it is important to lengthen the payment term to reduce the monthly cash flow. We have seen a significant number of requests for eight-year financing and I believe that it may be appropriate to even extend the term beyond that structure. It is also important to find a capital source that provides options beyond standard loans. The leasing option should always be considered. You also need to find a source that will remain in business throughout the term of your agreement and even beyond; a company with employees with whom you can establish a relationship and with whom you can count on to service your loan or lease. You need a partner, more than just a one off transaction.

Pratt: With so much competition and liquidity in the marketplace, it's hard to imagine there is any problem securing crane financing. The increased demand for cranes and trucks often prolongs delivery time and in a time of rising interest rates, Customers need to be aware that this will also increase overall costs.

With manufacturer backlogs holding up delivery of new cranes, the market for used cranes is hot? What are the issues in financing used cranes?

Buechler: Finance companies have to deal with reality and the reality is that used crane values are up due to heavy demand. The finance companies rely on their asset management specialists to keep their eyes on where values are going and what makes sense or not. Asset managers use all available information, including private sale information they hear about, auction results, classified ads, and conversations with dealers and end users to make assessments of what a machine is worth in today's market based on the condition of a machine and the hours on it. The real art for asset managers is not so much determining what the used piece is worth today, but what it will be worth four, five or may be seven years down the road. One significant difference in the financing of used equipment vis-à-vis new is that there is more typically a down paymentmade on a used equipment deal, while most finance companies are very willing to do 100% financing on new equipment.

Fry: Yes, we are seeing the majority of our transactions today being the purchase of used equipment. The issues with financing used cranes - on the credit side - do not differ too much from financing a new crane - time in business, historical pay history and profitability- are still key criteria. On the equipment evaluation side, we are constantly debating with our lenders over the value of the used piece. In general, the lenders will use auction values as a barometer for what they will advance. In today's hot market for used equipment, we know that in some situations units that actually get to auction are not the best as far as condition and hours are concerned. Typically, if they are marketable machines, they would have sold in the open market. We try to do as much research as possible on value before submitting a used crane transaction to credit, to alleviate any questions or debate over value. Basically, the majority of the cranes sales are private and up to now there is not any practical way to determine values through guides such as the auto and truck industry can with the NADA or Blue Book guides.

Another key issue with used cranes, especially those that are not being sold by a dealer, is chain of ownership. Prior to submitting the transaction to credit, we try to show the chain of ownership back to a bona fi de dealer. This means collecting copies of original invoices, titles, MSOs, etc. Although this can be frustrating for the seller, it will speed the process up on the documentation and funding side. We have had experience where we have documented a transaction and did not have all the proper information in advance, and establishing this chain of ownership can severely hold up funding. For the buyer, we are ensuring they are getting clear title or ownership to their new purchase. For the seller, we are ensuring that the sale is complete and their responsibility ends once funding occurs.

Goldberg: Again the issues are the same, to find a partner who understands the value of the equipment you are purchasing. Understands the value of the equipment as it depreciates over the term of the loan or lease. Cash flow payments are equally as important for used equipment. I have seen lenders who are here only for the short term. They do not know the collateral or its usage. The do not understand the importance of lower monthly payment. Their only advantage is a lower rate.

Pratt: It's a little harder to justify financing an older crane due to the fact that they candepreciate much faster than a new crane. You also need to be aware of overall condition relative to value and expected usage. We have to look at the credit quality of our borrower or lessee and rely on financial strength versus totally relying on the collateral and take the risk. We also take into consideration the fact that the residual value, over time, will fall at a faster rate than a newer machine.

Truck or tractor and trailer sales are also very good. Are the issues in financing these vehicles and equipment different from that of purchasing cranes?<

Goldberg: There are three trends I would like to mention: Examining the benefits of a loan versus a lease is essential to maximize the cash flow benefits and to insure that you are taking advantage of the tax benefits. Making sure that the transaction is structured so as to provide an acceptable cash flow payment for both new and used equipment and finding the proper capital source that can service your loan during its term.

Pratt: Not really. The demand for trucks has increased sharply of late, driving prices up and the excess capital liquidity in the market is driving finance margins down. We're seeing the same with cranes, keeping in mind that most cranes are much longer-life assets. We consider these factors as we work with our customers to come to agreeable terms.

Manufacturers are encouraging dealers to invest more in their product lines. Has there been a need for blanket type finance packages or is every program individually tailored?

Crane Credit has offered wholesale floor plan financing and rental fleet financing to Manitowoc Crane Group dealers since its inception on a blanket type package basis. Within that generalized offering, we also offer the ability for a specific dealer to choose the parameters that make the most sense for their business, so there is definitely flexibility available to any individual dealer.

Fry: I believe there is a need for 'inventory financing' for the dealers. If we can bringthe dealers a product that allows them to increase their inventory and product line, without having to make conventional monthly payments, they would be more inclined to bring in additional products. We need to work together with the funders, manufacturers and dealers to understand what the need is - is it a product that allows them to make principal reductions every three or six months? Is it a product that allows them to substitute in different units as they sell? We need to understand what would encourage the dealers to bring on more product and then design a finance tool to fit.

That said, the inventory financing is a two-edged sword. If the distributors have an inventory finance tool the manufacturers could require them to carry a larger inventory. In the good times both the distributor and the manufacturer will prosper but in slowertimes the burden will lie with the distributor and could cause financial hardships due to the restrictive nature of inventory and wholesale financing.

Goldberg: Inventory financing (floorplan and rental fleet) has always been a keyingredient to any equipment dealer. Unless the manufacturer is providing this arrangement it is important to find a lending source who will serve as your partner. You should also consider the lease scenario for long term rental units. Find a partner who is willing to learn the uniqueness of your operation and is here for the long haul.

Pratt: I don't see as much of a need for a one-size-fits-all program. Companies are at different stages and seasons in their life cycle and have different strengths and weaknesses. CIT takes a 'solutions' approach that fits the needs of our customers and tailors its packages to varying needs in each situation.

What are the most pressing concerns for a finance company?

Buechler: The major concerns are these: the ability for a customer to maintain their cash flow at acceptable levels when market conditions soften; decreasing equipment values in softer markets; large potential exposures with a smaller base of crane users than you might find in other equipment classes, on what is typically higher dollar value equipment; and maintenance integrity on the machine by lessee or obligor.

Fry: The major concerns are keeping the amortization in line with the residual values, credit worthiness of the buyer and clear title. Over the years, we have been able to encourage lenders to increase the amortization of cranes by constantly and consistently proving their value. It was not too long ago when the maximum term for financing a new crane was only 60 months. Due to our diligence in promoting the value of this equipment, we now see that seven years is the norm and can offer terms out to 10 years on the larger cranes. With used equipment, we are able to keep the amortization within the seven-year terms and assess this on a transaction-by-transaction basis. We are still financing cranes that are 1968 models and providing the buy era four or five year term.

As mentioned previously, credit criteria have tightened and we need to present a more in-depth credit package to our lenders for their review. Long gone are the days when an operator could try to go out on his own with merely a good credit score and a good story-today we need to provide a well thought-out business plan with references, a very clean credit history and a large investment in the purchase - a minimum of 20% down willjust get you started. And, again, on the used equipment, establishing clear title or ownership is key to getting the transaction to move along smoothly.

Goldberg: We're always looking down the road and around the bend. We make credit decisions based not only on past performance, but look at projections making certain that we set up alliances with customers who have been in business a long time and can survive the down cycles. After every up cycle there will eventually be a downturn. Lenders are in the risk management business and look for customers who recognize both present and future risk and can manage that risk.

Pratt: A few things are of major concern, and they are linked to each other: 1) The value of the equipment is key and that can be determined by any number of things like overall demand, age, etc. 2) The state of the economy also has an impact. If the amount of work available diminishes, demand for equipment will fall and the value of the equipment can fall with it. 3) Strength of the company. CIT Construction looks closely ateach company and applies different formulas to determine what terms are most favorable for their operation.

Does today's market lend itself more toward leasing or buying? Discuss this option and when is alease a better route?

Buechler: The crane business has historically been a loan business, with approximately 80% of all deals being loans. This is typically due to the long, 20-year expected lifespan of the equipment, strong expected equipment values over time, and the preponderance of rental companies buying our equipment and who need fl exibility to pre-pay equipment when they sell it. In a strong market such as we are in now, there may be situations where a customer will go with a lease instead of loan for cash flow reasons, as a lease will often allow for a lower monthly payment. In a weaker market, leases become more popular, due to the cash flow needs of the customer along with the fact that a lease gives the customer additional flexibility to return the equipment at the end of the lease in the event that conditions do not improve during the lease term.

Fry: Leasing is not the most popular option when acquiring a crane, in our experience. Many buyers have long memories and remember the old days of leasing when their end of lease buyout was higher than the used cranes on the market at that time. Currently this trend exists and has created hardship for some who leased with FMV (fair marketvalue) leases. There have been cases recently were the FMV is equal to or close to theoriginal acquisition cost of the crane. There are situations where leasing makes sense, but they should be fully researched and evaluated before signing on the line. Leases are made not to be broken.

We see the lease product used mostly for boom trucks where the TRAC lease productis popular. The TRAC allows the customer to get into the unit for one or two payments, has a stated buyout for the end of the term, salestax can be paid on a monthly basis and the rate is generally lower than for conventional financing, depending on the time of year.

When the economy is unstable and the crane companies are unsure if jobs will continue, that's when we see the most requests for leases.

Generally, short term leases are seldom cost effective for the lessee unless the total cost of the lease is factored into the job cost. The problem with the short term lease costs is the lessee will factor in the monthly payments but does not know or inquire what the return or turn-in cost will be. Depending on those costs, they can be a make or break situation on the job's profit margin. Another problem that happens with ashort term lease is after the job that the crane was originally leased for is completed, there may be another rental opportunity. Sometimes the customer may extend the lease with the leasing company, however, if they decide to purchase the crane after the extended lease term. But the cost may be very high compared to the market value as we previously discussed. Once again, it is important to understand the 'why' of your reason to lease.

Goldberg: It is really a case by case scenario. It's a scenario that every company should discuss with their tax advisor to ascertain what is best for their business. You are trading cash flow payments for tax dollars. This is not necessarily economy driven. There have been periods where interest rates have been so low that the tax benefits became in significant. It is common practice that when interest rates increase the demand for tax oriented leases increase. But, again, it should be an individual consideration based on your company's requirements. I have been involved with financing of equipment for over thirty years.I have seen good periods when demand and collateral values were very high. We have seen slow periods and know what it takes to survive. A significant number of companies are taking on new equipment, and there is some concern that they may be expanding too rapidly. Timeslike this bring out many new lenders. This can be beneficial for the borrowers.

Pratt: As rates continue to rise, the trend usually follows that there will be more leasing with residual structuring becoming a larger piece of the overall finance puzzle. Customers are constantly concerned about cash flow; the 'right size' payment is always a concern.