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December 2017
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Five steps to consider regarding financing

Proper and adequate financing is one of the legs of the stool that keeps your business operating. We need the financing to support cash flow, to support parts inventory, work-in-process and new and used equipment inventories. Banks as well as vendors supply the financing and in the case of vendor financing we are comfortable that they at least know the industry they are lending into. Some major banks also have equipment divisions and will provide inventory financing as well and rental equipment financing for your short and long-term rental activities.

But no matter how comfortable you are with your financing situation there is always room for review and planning to avoid interest rate risk and liquidity exposure. Why? Because:

Interest rates have nowhere to go but up. Check out your annual interest rate expense and consider what impact it would have on your business if interest expense doubles.

Banks, no matter which one you use, are constrained by tougher lending standards. Best if you review your loan covenants and collateral status and check you are in compliance. If not, get it fixed before you next bank audit.

Vendors also have standards to maintain. In most cases dealers are required to submit financial data to vendors to support floor plan and rental unit financing.

I, for one, find working with local banks an acceptable option if you can work with the right person who will take an interest in your industry and take the time to learn the equipment and its orderly liquidation cycle. In the equipment business, there are times when you need our banker to go to bat for you, which you may not get from one of the specialty banks.

My banker pays us quarterly visits to discuss operating results and future financing needs. We send him industry specific publications and emails. He even attends industry events to get a feel for the industry and what vendors are anticipating for the next year or so. In short, this bank works with us and helps us avoid issues that will get us in trouble. Having the bank comfortable with the OLV figures for the equipment goes a long way to making this program work.

I have mentioned the Rouse Report before and suggest that you sign up for the free monthly report that covers equipment rental metrics and does have an industrial lift truck category. Rouse covers rental rates, time utilization, dollar utilization, equipment values as a percentage of original cost, average age of equipment in the fleet and more. There is not a better way to keep abreast of what is happening out there then by using current data. Sign up today and make sure to copy your bankers when you receive the monthly report.

When reviewing financing arrangements you may want to consider the following:

  1. If things are going well at this point in time you may want to pay off principal faster by using a Principal plus Interest formula on your term loans. If the need to refinance comes about you will find yourself in a better equity position with the collateral making the refinancing easier to obtain. This same accelerated payment program can be applied to most of your loans, whether it is an operation line of some sort or a term note. Every little bit helps.
  2. Take steps now to develop a program that allows you to lock in your current rates before floating rates increase. Better yet put yourself in a position to use a floating rate with the option to switch into a fixed rate.

You can also enter a swap agreement to lock in an attractive rate. Swaps, however are a little more complicated and require you stick to the program of pay a penalty for changing the deal. I use one for a block of rental assets I know I will keep for the term of the loan. Otherwise, if I sold off one of the assets covered by the loan I would trigger a penalty. You also have to stay with the swap deal full term. If you sell the business and pay off the swap early you can also incur a significant penalty.

  1. I also use a program where I have an equipment line that I pay a floating rate on until I top out the line, which then flips into a term loan with a fixed rate. Again, this is a flexible arrangement which gives me the ability to generate rentals before I start making principal payments.
  2. Try to plan out your debt schedules so that you always have at least 50% of your assets in the money. This will apply more towards your term debt where having too much debt coming due in one year could become a problem if you need to refinance or need to sell assets to generate cash.

I like to have an appraisal of the rental fleets performed annually. Having

appraisal numbers that support your book asset values gives your banker a lot of comfort, as mentioned earlier. In addition, these appraisal numbers provide support for used equipment sales that more often than not generate higher margins when compared to dealers who do not appraise their rental assets.

  1. Be prepared to defend your covenant calculations by making adjustments for one-off type or unusual transactions that may throw your calculation results into negative territory. Do your own calculations and NEVER let the bank do them for you.  Believe me it pays to spend some time on these covenants in order to avoid problems with the bank loan committee.

There will be a lot of changes coming down on your industry as a result of interest rate changes, tax changes, bank rules changing and a not-so-clear indication of where our economy is headed. All of these issues will impact your balance sheet and cash flow, both issues of great importance to your banker. That being the case it will be worth your efforts to spend some time on our financing needs, covenants and current banking relationship.

Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail to contact Garry.