Beyond Banks: Financing Equipment

If your cash flow or financial strategies prevent you from buying your equipment outright, specialized equipment financing/leasing firms may be the financing route to take.

Success of a business, it productivity, and its competitiveness can depend on having the right equipment. But the equipment necessary to operate a scrap processing and recycling business can cost hundreds of thousands--even millions--of dollars. That’s a large chunk of change for anyone to come up with. Even if the cash is available, many may be reluctant to tie up their operating capital in equipment, particularly during recessionary times.

Scrap recyclers making an investment in equipment have three basic options: Pay out in cash and diminish operating capital, borrow from a bank and deplete a credit line, or turn to one of the equipment financing/leasing firms that cater to the scrap industry. The first two strategies are self-explanatory. But how does a financing/leasing arrangement work?

Jerry Michaud, president of Venture Leasing and Capital Corp. ( Edison, N.J. ), explains how his financing company works: “The customer goes to an equipment vendor and picks out a machine. He comes to us and asks us to lease it. Then we buy the machine from the vendor and lease it to the customer.” He estimates that 60 percent of the firm’s deals are handled without meeting the customer or seeing the equipment.

While the term “leasing” may connote “renting” to many, most equipment financing firms are reluctant to get involved with such short-term leasing or renting arrangements. “The problem in this industry,” says Michaud, “is that equipment is often specialized to a particular user’s needs.” This customization makes equipment rental uneconomical for both the financier and customer, except with certain “generic” equipment such as some balers. Rental also doesn’t make sense in most situations, Michaud believes, because the customer isn’t building equity in his equipment as he would be with a finance/lease arrangement.

Financing/leasing companies like his fill a void, says Michaud, because few equipment vendors finance equipment themselves. “You really can’t do both; you can’t sell equipment and provide the financing internally,” he notes. “There’s not enough time in the day to do both.”

Taking Over Where the Banks Leave Off

Equipment financing firms, while serving a function much like that of banks, can also satisfy the gap left by those institutions, he offers. "In today's market," says Michaud, "most banks aren't in the equipment financing business. They have too many problems of their own. "There are some banks, of course, that are willing to finance recycling equipment, but leasing/ financing firms point out that the two types of lenders aren't competitors. Banks may offer a marginally better rate, says Wally Crowe, sales manager of Circle Business Credit's waste equipment division ( Louisville, Ky. ), but financing and leasing companies provide a means of secondary financing. This, he says, means that business owners can keep their lines of credit open at the bank, where they can be used as a safety net for things like working capital and financing receivables. "We make our customers better bank customers," he notes.

Michaud notes another advantage to financing through equipment lease specialists. "It's a very easy sale for me if a customer is deciding whether to deal with me or a bank. We might be a little more expensive but we're going to give them much better service because we understand the equipment, we understand the use and all these other factors that a bank would not even begin to understand."

Circle Business, for example, offers more options than a bank, Crowe explains, in that a customer whose scrap operations come to a halt during the winter can request to skip payments at that time. Or, he notes, a company that anticipates being hit hard by taxes each April can request II annual payments. "Every transaction is different and we're flexible," he says. "We can set up any type of financing option-a dollar buyout option, a 10 or 20 percent option, or fair market value."

A further example of the specialized service that financing/leasing firms offer, says Michaud, is that banks often require that loans be secured with real estate since they aren't necessarily aware of the value of the equipment, while firms like Venture and Circle business know the worth of the equipment itself and can remarket it if necessary. Venture is willing to finance equipment on the basis of a company's operations and the equipment it's trying to acquire. "We have a comfort level with our customers and their operations and secure the loan with the piece of equipment we're lending on," he notes. "We set up the terms of the financing based on what we feel the depreciation and useful life of the equipment is going to be."

Circle Business bases its financing arrangements on what Crowe calls the "three C's"--character, capacity, and collateral. After reviewing trade contracts and financial and bank statements to determine its confidence level in the customer, Circle tailors the financial package.

This service, however, has its price: Equipment financing/leasing companies are traditionally more expensive than banks since they often operate on bank lines, borrowing at one rate and lending at another. Venture charges interest rates ranging from prime plus one to prime plus four, depending on the firm's "comfort level" with the customer. This level is also reflected in the down payment required-anywhere from 0 to 25 percent of total cost. Customers are responsible for insurance and maintenance for the duration of the lease.

Circle Business operates with funds from Xerox Corp., its parent corporation. The company will only finance for a maximum of 60 months, Crowe says, because most equipment should realize a return and start generating a profit within that time.

How much financing will such firms provide? Circle Business has financed all types of equipment with prices ranging from $5,000 to $5 million, although $2 million to $3 million is generally the most it will finance, Crowe says. The company doesn't have statistics on the exact breakdown of particular types of equipment financed, but Crowe notes that balers and car crushers are popular in the financing arena.

Some Guiding Factors

The decision of whether to work with a finance/leasing firm or a traditional lender, says Michaud, should be based on the customer's financial requirements. "There are some tax benefits to leasing," he points out. "However, you have to be in a position to take advantage of those benefits or it won't do you any good." Talking with a financial planner and a finance/leasing firm can help in determining whether you are in such a position.

Timing also plays a role in the decision. Equipment vendors tell Michaud that the last thing customers consider when buying equipment is how they're going to finance it. "A vendor can spend three months selling a customer on a piece of equipment and when he finally says yes, his financing hasn't even been discussed," he says. "So when the deal finally gets to our office, it's like they needed the equipment yesterday." Luckily, he claims, the firm can turn around a transaction in 24 to 48 hours.

Delores Beralek, inside sales representative for Mosley Machinery Co. Inc. (Waco, Texas), agrees that financing is usually the last concern of clients that are contemplating purchasing a piece of equipment. She compares it to going out and buying a new car: "You look and you look and you look and you finally find the one you want. The last thing you think about is, 'Well I guess I need to fill out some papers to get this thing financed.'"

A Different Perspective

Vendors and manufacturers like financing and leasing companies because they help them move their products. "We have found leasing over the past two years to be a very necessary tool," says Don Thompson, lease finance manager with Al-jon Inc. ( Ottumwa, Iowa ). "It gives us the opportunity to put the machinery in the customer's hands. ... I'm finding right now that more and more people are going through the extra length of doing tax and price comparisons about leasing than ever have been, and a lot of these people are deciding to go with lease purchases. ... A significant number of our transactions are leases.

Beralek, who works with Circle Business and other financing companies, notes that "vendors may say they have in-house credit, but most of them go through leasing companies.” She says that some manufacturers choose not to finance their own equipment for the same reason that the purchasers do--simple economics. "We're not bankers; we make equipment. We let people who are experts at financing handle it."

Manufacturers prefer to remain impartial in advising their customers as to how they should pay for their equipment, but Beralek notes that very few of Mosley's customers go through a bank and the company provides its customers with the names of several different leasing companies.

Before establishing a relationship with financing companies, Beralek says, manufacturers make sure that the financing companies themselves are solid. Manufacturers look for a firm's ability to be able to make a deposit before the equipment is manufactured and to pay in full before it is shipped.

Customers have their own criteria in working with leasing and financing companies. Carol Navarro, owner of Bayway Metals ( Elizabeth, N.J. ), says that in recently financing a baler and a crane through two leasing/financing firms, the criterion she examined most was honesty. She believes it's also important to look for I somebody who can explain things completely to you so that you're not in the dark, someone who speaks English, and, of course, the cheapest interest rates and the best payment programs."

Navarro likes the idea of financing: "Number one, you're building up your credit and number two, you're not putting out all the money at one time. If you laid out $150,000 in cash all at once, you wouldn't have that money to work with anymore.”

Going through a bank wasn't an option for Bayway because the company had no credit. Even if she could get a bank loan, Navarro says, it would be difficult because banks are not interested in understanding the equipment and would secure the transaction with a lien on her property. Leasing and financing companies were more willing to deal with her, even with no credit history, because they had faith m the equipment and her company's assets.

Navarro says if there were no such thing as equipment leasing/financing companies, she would have paid cash for her equipment. But she prefers the arrangements she made: "I would rather leave my money in the bank where I get interest on it myself. Plus, if I need it for something else, it's always there."•

--Beth Rogers, a Washington, D. C.-based freelance writer