Choosing the appropriate equipment financing options ensures that your business operations run smoothly and maintaining capital for expansion is crucial.
By Prachi Wagner and Ed Roberts
The $70 billion waste and recycling industry is a capital- and equipment-intensive sector with nearly $6 billion in annual capital expenditures.1 This demands that companies make crucial decisions about how to manage funds and secure assets while remaining positioned for growth. Choosing equipment financing options that ensure business operations run smoothly and maintain capital for expansion is crucial.
The choice comes down to this: Is it better for the bottom line to lease, buy or combine the two? Growth, taxes and accounting are vital considerations in decision-making and evaluation of complex funding options. Moreover, misjudging the potential impact of an option can create cash-flow problems and limit your ability to take advantage of business opportunities.
Capital Expenditure Line of Credit
A capital expenditure line of credit gives access to funds for various business expenses while only paying interest on what is advanced until maturity or until the advance may be refinanced or converted to a term loan. This can include acquisition financing, custom equipment financing, short-term equipment rentals and asset expansion, such as cell development or transfer stations. The main advantages are flexible repayment terms and the ability to leverage cash for growth. A revolving line of credit also provides a single contract; borrowers do not need to reapply each time to tap funds.
Equipment Loan/Lease
A loan or lease allows business owners to borrow for specific equipment expenses and repay over a longer time, usually up to a maximum of seven years. Advantages include the ability to choose fixed or variable interest rates and a variety of repayment schedules. Leases offer similar structures and may include additional benefits.
Which Option?
In general, a capital expenditure line of credit is ideal for operating expenses, acquisition financing and possibly asset expansion, including real estate and custom equipment. A line of credit may provide for conversion of advances into term loans with interest and principal payments. Rather than fund assets with cash, a line of credit infuses liquidity that allows the borrower to reinvest in growth or manage seasonal operations.
For example, a waste hauler was interested in building a transfer station to reduce its disposal costs and acquiring a company’s assets to enhance its existing route structure and increase margins.
Based on the hauler’s historical cash flows and the company’s strong management, acquisition financing was provided through a line of credit and a term loan for the transfer station. The hauler increased revenues and margins while maintaining liquidity to access other growth opportunities.
A term loan is ideal for expenses that take longer to retire, leaving an operating line of credit available for operations. Equipment lines of credit can be entered into in advance to expedite borrowing and assure credit is in place when financing is needed. Loans and leases can be structured with low upfront cash requirements.
In another example, a waste hauler recently won a contract that required the hauler to immediately purchase several new trucks, buy existing bins for customers’ homes, and replace several older trucks over the next six to 12 months. The hauler expected significant costs to start the contract. The hauler did not want to finance these costs with advances under its line of credit and instead wanted to keep availability under its credit line for unforeseen events during contract start-up.
One hundred percent financing was provided for the new trucks and established an equipment credit line to replace the older trucks in the months ahead. The financing structure provided the necessary liquidity, and the equipment credit line provided peace of mind: financing would be available when the replacement trucks were needed.
Most companies rely on a combination of both financial options, depending on the individual needs and structure of the business. This practice is often most appropriate for mature companies with an established waste collection business or companies that are vertically integrated with landfill or transfer station assets.
Find a Lender Who Knows Your Business
In addition to understanding financing options, it is equally important to work with a lender who has waste industry expertise, including knowledge of business cycles, equipment needs and collateral situations. That type of lender can become a trusted advisor that not only provides financing, but also helps business owners navigate those crucial growth stages.
Prachi Wagner is a Relationship Manager covering the Waste and Recycling industry for Wells Fargo Bank. Based in Charlotte, she covers 30 states for Wells Fargo throughout the North East and Southern regions. Prachi can be reached at [email protected].
Ed Roberts is the Senior Vice President, Specialty Vehicle Group, part of Wells Fargo Equipment Finance. Based in Dallas, he supports the waste, recycling and vocational markets across the U.S. through a field sales team. He has more than 30 years of leadership in sales and lending roles supporting customers, dealers and manufacturers to acquire and sell equipment in the vocational and transportation industries. Ed can be reached at [email protected].
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The opinions expressed in this document are general in nature and not intended to provide specific advice or recommendations for any individual or association. Contact your banker, attorney, accountant or tax advisor with regard to your individual situation. The opinions of the authors do not necessarily reflect those of Wells Fargo Equipment Finance or any other Wells Fargo entity.
© 2018 Wells Fargo Bank, N.A. All rights reserved. All transactions are subject to credit approval. Some restrictions may apply. Wells Fargo Equipment Finance is the trade name for certain equipment leasing and finance businesses of Wells Fargo Bank, N.A. and its subsidiaries.
Note
1. Source U.S. Census Bureau, 2015 Annual Capital Expenditure Survey and Waste Business Journal.