Today we will examine the financial challenges and regulatory changes that impact your rental and leasing business.
Interesting topic but one that is also pertinent in today’s economic environment.
When I first drafted the title for this piece ……FINANCE/RENTAL/LEASING…. It made me think about many different topics of discussion that effect dealers, customers, bankers, OEM’s, and all others related to these type of business transactions. There are probably a thousand offshoots I could work with that would produce at least a 100-page book.
So, why don’t you take a blank piece of paper and start jotting down topics related to FINANCE/RENTAL/LEASING and see how many you come up with. And then send me the list. The person with the greatest number of topics directly associated with FINANCE/RENTAL/LEASING will receive a selection of some of my better cigars.
Some of the topics I thought of are FLEXABILITY, COST REDUCTION, MORE UPTIME, LEASE/BUY DIFFERENTIAL SLIPPING AWAY, BALANCE SHEET, EQUITY,
Some of you listened, many did not….again running the gauntlet hoping to avoid an encounter with your bank. So now, I am suggesting a new approach to protect your investment and to make it bulletproof if that financial crisis occurs.
So, where do we start?
What the heck…let’s start with FINANCE.
From the Finance side I currently encourage dealers to properly manage their debt matrix so that they have more dry powder than maybe they have carried over the last 4-5 years. I say this because it appears that we have more corporate debt on the books today than we did in 2008 before the last crash. In fact, there is so much debt out there that there is no reasonable way to work the math to pay it off.
And it is no secret that the Fed encouraged borrowing to grow the economy and kept interest rates low to raise asset prices. And guess what, it worked.
The only problem is we have so much debt on the books now that these latest interest rate hikes are going to cause defaults on outstanding loans or bond issues, which in turn will cause a recession and another round of bank nonsense where you will find that your collateral value is less than it has to be, followed by a request to sell off rental units to provide cash flow to reduce debt. Sound familiar. Many of us remember 2008-9 and should prepare now to avoid another round of playing with the bankruptcy court.
What many economists believe it that a credit crisis will cause the next recession, and not the other way around where the recession causes debt default’s. A most likely scenario when you consider how much total debt is outstanding when you take into account HOUSEHOLD, CORPORATE, GOVERNMENT AND FINANCIAL DEBT. How does $238 Trillion grab you? About 330% of estimated GDP. (with the total not including unfunded government obligations). SCARY NUMBERS TO PAY ATTENTION TO.
The bottom line here is you do NOT want to overleverage. You DO want to clean up your balance sheet and reflect as high a book value as you can. (which means using a book depreciation formula to support a book value in line with the orderly liquidation value of your rental assets). In short, do not hurt yourself by writing off 100% of your rental assets which understates the true equity value of your business. Make your business as attractive as you can and keep it that way.
In addition to properly depreciating your rental and other fixed assets I would take steps and find ways to borrow less for both new inventory as well as rental assets. As far as inventory is concerned I believe that rental as a method of providing utility value will continue to put pressure on new equipment sales as well as long-term leases with maintenance. Customers today want flexibility, lower cost options and more manageable rental contracts. When you think about it what they want is a deal that one of the national or regional rental companies could offer them. Equipment when they need it without any formal long-term arrangement to deal with. And if you have not already, I am sure you can look forward to this new competitor hitting your market and customer base.
One way to lower your borrowing needs is to keep your rental trucks longer. You can probably get at least another four years out of your current fleet with a modest cost increase. Or, you could refurbish your units and get quite a few more years out of them as rental units. The rental companies are doing this and some OEM’s that supply equipment to rental companies are doing it and selling the units at a substantial discount when compared to the price for a new unit. Can you imagine your ROI on these units…..they will almost double. To sum up you buy less, borrow less, increase cash flow and just about double your ROI. And if your OEM’s were smart they would assist you with this process.
Play with the numbers if you don’t believe me, they produce a much healthier balance sheet, more profits on the income statement and a lot more cash flow. A COMPANY PREPARED TO DEAL WITH ANY ECONOMIC EVENTS THAT TRANSPIRE.
From a regulatory standpoint we have both GAAP and Tax Issues to consider. One will be good for your business and one maybe not. The change in the accounting for leases starting in 2019 will make customers record the debt associated with leases on their balance sheet. Have a million dollars’ worth of lease payments on your books means you will not have another million-dollar liability on your balance sheet offset by million-dollar soft asset on the asset side of your balance sheet. The goal is to even the playing field so we know how much debt a company has outstanding which is somewhat shielded by operating lease contracts. Kind of makes sense as long as you are not the person who has a company with a lot of operating leases on the books. I guess you figured out by now which regulatory issues is the bad one.
Even though there is an asset to offset the lease liability the debt/equity ratio becomes much less attractive, and even if your bankers say it will not make a difference, that is hard to believe especially if you are having credit issues which concern the bank.
One interesting part of the lease conversion is that all leasing in effect going into 2019 will have to be converted to the new lease rules. If you want to see how this would impact your business, look over the lease footnote in your year-end financial statement where your total outstanding lease payments are noted….and there you have it. So, don’t be surprised if customers start shying away from the 5-year operating leases since they no longer provide the financing benefit they have up to this point. In fact, you may find your sales team is getting questioned about what you can do to mitigate this issue. And what is the answer to that question? Think about it, because the previous comments made above provide some relief along these lines.
My goal for the last couple of years has been to encourage dealers close to retirement status to clean up the house and get out before another financial crisis shows it ugly face and depletes the value of their business once again, leaving them with another long-term wait until the value is restored to where you can receive a reasonable value for your lives work.
Some of you listened, many did not….again running the gauntlet hoping to avoid an encounter with your bank. So now, I am suggesting a new approach to protect your investment and to make it bulletproof if that financial crisis occurs. BORROW LESS, KEEP RENTAL UNITS LONGER, REBUILD RENTAL UNITS TO SELL OR RENT, PAY DOWN DEBT, INCREASE ROI ON RENTAL ASSETS, HAVE THE ABILITY TO TAKE ADVANTAGE OF LESS FORTUNATE DEALERS, HAVE THE ABILITY TO TAKE MORE OUT TO PUT INTO ANOTHER VENUE SAFE FROM CREDITORS, DO YOUR BEST TO GET OUT OF PERSOANAL GUARANTEES, AND BE IN A GOOD POSITION WHEN IT AGAIN TIME TO TRANSITION OUT.
I left one major issue I am always yelling about out or my list of potential topics related to FINANCE/RENTAL/LEASING. Can you tell me what that is? A couple of additional cigars at stake.
Send your list or my missing link to email@example.com.
It is time to start planning for economic changes as well as customer wants. Make some time to do that.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail firstname.lastname@example.org to contact Garry.