Equipment financing through private finance companies offers several advantages for small-to-midsize companies. Whether using a bank or a private finance company, however, businesses should also consider lender qualifications.
By Anne Eubanks
For many solid waste and recycling businesses, using a private finance company to fund equipment instead of a bank is the right strategy for a number of reasons. Doing so preserves a company’s bank lines of credit for short-term working capital needs. It also increases the likelihood of equipment loan/lease approval and simplifies the financing process. In fact, financing equipment with a finance company is a best practice of many small-to-mid-size haulers in the industry.
Equipment Finance Challenges
Solid waste and recycling companies spend a significant percentage of their annual capital budgets on equipment. Specific needs range from front loaders, side loaders, rear loaders and recycling vehicles to curbside carts, front-load, rear-load and roll-off containers. Often, balers, material recycling facility equipment and landfill equipment must also be purchased. These are standard tools of the trade for solid waste and recycling businesses, and all of them can be financed. All of them also require periodic replacement, since for some of these assets lifespans will be cut short by changing technology or operational needs. In addition, because maintenance frequency and expenses rise for aging equipment, these factors also affect equipment turnover. But for many small-to-medium-sized companies in the industry, financing equipment is challenging.
Approvals
Despite recent news about a rise in bank lending to smaller businesses, small- and medium-size waste haulers say they continue to face more difficulty than their larger peers in obtaining financing from bank sources. Regulations also require banks to use more credit authorization levels than private finance companies, a situation that complicates and lengthens bank financing. In contrast, a private finance company is often able to approve an application and provide funding within 24 to 48 hours. The reason is simple. Banks were required by federal law to tighten their lending standards following the home mortgage crisis of 2008 to 2009. They were also required to pay closer attention to oversight and enforcement due to added regulations that are still in force.
As a result, bank lenders generally tend to favor large corporate borrowers over smaller businesses, believing larger customers are better able to withstand market fluctuations and economic downturns. Some banks have also stopped offering loans below a certain dollar amount, such as $250,000. These policies also favor larger borrowers.
Requirements
In most cases, paperwork is more streamlined when doing business with a private finance company than with a bank. It is not unusual for a bank to require three years of financial statements, business and personal tax returns, and other information during the approval process. Again, banks have become more risk averse since the Great Recession and are responding to increased regulations in their approval requirements.
Private finance companies do not operate under the same regulations, however, and thus are in a better position to trim the application process. For example, one private finance company requires a couple of years of business tax returns for an equipment loan or lease valued at $250,000 or greater. Financials may not even be required for borrowing smaller amounts.
Lines of Credit
Bank lines of credit are valuable resources for working capital that can be used to meet short-term expenses, such as payroll. Using bank lines to finance equipment, on the other hand, can tie up those lines and make them unavailable during an off-season crunch or an emergency.
It might be tempting to use a line of credit for an equipment purchase when time is of the essence, but companies should try not to do so. Lenders have a much more streamlined documentation and funding process when they fund vendors directly versus reimbursing the purchaser after the fact.
Finance Provider Checklist
Regardless of whether a company chooses a private finance company or a bank as its equipment finance partner, there are certain benefits that the lender should bring to the table. When considering equipment finance providers, waste haulers and recyclers should look for the following attributes.
Direct Lending
Make sure the equipment finance provider is a direct lender, using its own money for financing. Direct lenders are generally able to provide better terms and rates than their competitors. Dealing with a direct lender also simplifies paperwork, as there is only one set of documents to read through to understand the agreement, including terms for calculating pay-off.
Specialization in the Solid Waste and Recycling Industry
Equipment finance providers and their customer representatives should have deep experience with the solid waste and recycling industry among their other finance niches. The finance provider should understand the needs of companies in the industry in order to provide the best advice and financing terms.
Nationwide Coverage
Dealing with a regional equipment finance provider can be limiting if a solid waste and recycling company later expands outside its traditional markets. Starting with an equipment finance provider that covers the entire U.S. can eliminate this potential problem. A provider with national operations can also leverage equipment-finance best practices from other parts of the nation to serve its regional customers.
Flexible Financing
Some private finance companies offer leases in addition to loans, but others do not. The same is true for banks. Most small-to-mid-size waste haulers need flexible financing solutions and benefit from the ability to consider all their options through one provider.
Equipment Financing Options
An estimated 78 percent of businesses in the U.S. finance equipment through loans or leases, according to the Equipment Leasing and Finance Association (ELFA). Equipment finance providers that offer both options are in the best position to help their solid waste and recycling customers evaluate whether to buy or lease a piece of equipment or purchase it outright. In general, businesses planning to acquire equipment should start by estimating the net cost of the asset, keeping in mind tax breaks and eventual resale value.
There are many reasons why most businesses use loans or leases to finance equipment. ELFA research shows that companies leverage equipment financing to make smaller payments over time while their equipment generates revenue. They may also customize payments to match seasonal cash flow, outsource asset management of the equipment and bundle equipment costs, maintenance and related services into a single payment, conserve upfront cash, afford newer technology, and replace or upgrade equipment as needs change.
Types of leases offered by equipment finance providers can include operating leases, which are similar to rental agreements and not recorded on the balance sheet; capital leases, which are treated like assets on the balance sheet; and TRAC leases, short for terminal rental adjustment clause lease. TRAC leases allow customers to purchase the equipment at the end of term based on an agreed amount.
Consider Lender Qualifications
Equipment financing through private finance companies versus banks offers several advantages for small-to-midsize companies, which face more difficulty than their larger peers in obtaining conventional funding. Whether using a bank or a private finance company, however, businesses should also consider lender qualifications. Direct lenders with deep experience serving solid- waste and recycling companies are in the best position to offer advice and flexible financing options.
Anne Eubanks is a Regional Manager for Advantage Funding (Lake Success, NY) and an expert in equipment financing for the solid waste, recycling and transportation industries. Advantage Funding is one of the largest transportation finance firms in the U.S., specializing in serving solid waste and recycling organizations as well as other transportation businesses. Anne can be reached at (714) 231-2822, via e-mail at [email protected] or visit advantagefund.com.