Financing Equipment: Who Do You Trust?

Ted A. Grant

Finding the right partner to finance or lease equipment is critical, particularly with the specialized equipment used in the refuse industry.

Three primary financing sources include local banks, captive (manufacturer) finance companies and independent finance and leasing companies.

A relationship with the local bank is generally an integral part of your daily business. Banks normally provide services such as checking accounts, working-capital credit lines and loans for real property, such as land and buildings. However, they may be conservative with equipment financing due to their lack of familiarity.

Banks will support you as long as your business is capitalized properly and remains profitable. However, this relationship can deteriorate when you experience rapid growth or have unexpected problems in your daily operations; your finance ratios do not meet bank guidelines; or if your bank changes ownership or even its business philosophy.

Banks made more than 1 million small business loans in 1994, according to the Federal Reserve Board's Survey of Terms of Bank Lending to Business. In 1994, banks loaned small businesses $99 billion; only 16 percent of the loans reportedly had maturities of more than one year (see pie chart). Although short-term loan rates may seem attractive, floating rates, annual renewal fees and origination points can distort true interest expenses and require extra time to negotiate annual credit lines.

Another option, captive financing, is provided by a manufacturer to support the sale of its products. For example, automobile, truck and equipment manufacturers offer financing and leasing programs as a sales incentive. Generally, these sources only fund the lease or purchase of their own products. A captive finance company usually can provide quick approvals at a competitive rate for purchasing its products.

Independent financing and leasing companies have been around as long as bartering or trading have been. They either use their own money or, in most cases, use the financial market to borrow funds.

The independent finance company generally is less conservative in its terms and the amount it is willing to finance, as long as it specializes in your business.

Before financing your next equipment purchase, consider the following factors:

Bank Credit Lines. Consider alternative sources to your bank credit line. Look for total package financing from an independent financier or consider a captive finance company for a certain product. Keep your bank line available for growth, potential acquisitions and normal operating expenses.

Blanket Asset Lien Filings. Some banks and financial institutions require signing blanket asset filing statements when financing specific equipment. Make sure the company files liens only on the equipment you are financing, not on all of your assets. Tying up your assets can make your life difficult when you need to react quickly to a timely business deal.

Fair Pricing. Check with various sources to determine if your finance or lease rate is within industry standards, based on your company's size, growth pattern and success, length of time in business and the type of equipment that is being financed.

Equipment Credit Lines. Although there are unlimited sources of financing and leasing, select one that can provide an equipment credit line. This allows you to take advantage of new opportunities with pre-approved funds and generally longer, more favorable terms.

Transaction Lending Versus Relationship Lending. Choose a lender that has a philosophy to remain constant in their credit practices and relies on long-term relationships for growth. These companies are usually stable and have years of experience in the finance industry. Ask others in your industry which finance/lease sources they use and their selection criteria. Also, it's important to pick a finance partner whose integrity and reputation is indisputable.

Specialists. Choose a source that specializes in the refuse industry. Municipal solid waste is a complex industry and it requires a variety of equipment. Finance sources that don't understand your business may be conservative in their credit decisions and collateral values. However, those sources who do specialize in your industry are generally committed to your business and probably belong to the solid waste industry's trade associations and organizations.

While no definitive formula exists for choosing a lender, a variety of factors should influence your decision, including the company's rates, service and convenience, the lender's knowledge of your business and your relationship with the lender. Although these last two factors often are considered secondary, they can become increasingly important as your business grows and your financing needs diversify.