Most contractors have ongoing needs for tools and equipment to handle business expansion, equipment replacement or maybe certain job-specific requirements to make the process more efficient. While the need is there, contractors have the option to either try to own the equipment or rent it if rental makes more sense.
As you know, we cover the rental option on a regular basis in this column because rental is readily available to cover most equipment needs. But for contractors that make the decision to own either new or used equipment, funding the purchase with cash, a bank loan or other third-party financing such as a lease has to be considered. In my experience, there is currently financing available at reasonable rates being offered over reasonable terms that should allow you to pay off the purchase debt in the normal course of business.
While I know what is happening in my financing world, I thought I would expand my knowledge by asking one of my financing sources for input into current market conditions. So I called Glen Mueller of First Midwest Equipment Finance to discuss how things are going in the equipment finance markets and what you could expect if you need to obtain financing for equipment needs.
First Midwest Bank has a lot of experience in the equipment dealer and rental company arena. First Midwest Equipment Finance is a separate entity that focuses on financing all types of equipment, so it knows this aspect of financing and is more comfortable with it than a typical bank. In other words, working with a firm such as First Midwest Equipment Finance provides a better option to get equipment financed with minimal fuss as opposed to working with a bank that doesn’t do this type of financing on a regular basis.
Knowing how tough it was to obtain financing during the 2008 Depression (that’s what I call it), I asked Glen where we stand now compared to then. He pointed out that the financial crisis of 2008 was one of the worst in seven decades with every sector of our economy affected. He also noted that during this time over 200,000 businesses closed their doors, resulting in massive historic loan defaults. This resulted in new loan regulations that made it almost impossible to loan money for normal business needs. But as the economy continues to heal, there is now plenty of capital available for investment and, as a result, Glen is expecting a banner second half of the year for equipment financing.
I asked Glen to rank on a scale of 1 to 10 where we stand today in terms of financing availability for equipment acquisition. He said “10.” Enough said.
Advantages of Leasing
The standard financing deals today run from 36 to 72 months. Most are capital leases with a $1 buyout where customers take tax depreciation on the cost of the equipment. For contractors planning to keep the equipment, this is a popular choice. True leases are also available where the customer can expense the lease payments as they are paid. And as of today, interest rates are very reasonable.
Leasing also provides cash flow benefits because you can avoid cash outlays and little or no down payment. If you plan it right, the asset should pay for itself as you get paid for the work you’re doing using the equipment.
Even though working with an equipment finance company is easier today, you still have to be prepared to provide information in support of your loan application. I strongly suggest you do your homework before you ask for the loan to avoid delays in the process. Here’s what you need to provide:
- A complete and legible credit application (You would be amazed at what we get.)
- Two years of tax returns or annual financial statements
- A current interim financial statement
- The equipment proposal you are working with
A finance company prefers folks in business for at least two years, who have an acceptable credit rating for the company and personally. First Midwest Equipment Finance offers a $350,000 application-only program — no financials are required for customers with over three years in business. It can’t get any easier than that. They also cover the entire U.S. market.
A finance company also expects proper documents regarding the equipment you are buying so that they can ascertain the collateral value of the equipment in the future. In fact, the collateral value is key to the type of terms you will get on the transaction.
My personal experience with equipment financing mirrors what Glen told me. The funding is out there and the loan qualification standards may not be back to 2007 levels, but they are better than they were in 2009-10.
Of course, I have to remind you one more time to make sure taking on a 36- to 72-month commitment works for you when compared to renting available equipment.
Have questions on equipment financing? Contact Glen Mueller at (847) 871-4205 or firstname.lastname@example.org.
Garry Bartecki is the managing member of GB Financial Services LLP and a consultant to the Associated Equipment Distributors. He can be reached at (708) 347-9109 or email@example.com.