It is possible to receive financing for your fleet expansion, even if your credit record contains imperfections. Be clear and direct in stating your needs, and furnish all documentation a lender requests when attempting to acquire the equipment you need.
By Anne Eubanks
So, you’re ready to expand your fleet and you’d like to get financing to do it. But how to develop a plan, prepare for lenders’ questions and submit an application that will be a slam-dunk for approval? Below are some tips to help you when it comes time to wade through all of that paperwork and important information needed for the application.
Explain and Justify
First and foremost, you must be able to explain and justify to a lender the purpose of your company’s intended expansion. Why is expansion necessary? Have you picked up a new route or new customers that exceed your current hauling capacity? Have you acquired a new franchise agreement, or do you plan to bid on a municipal contract that will require additional equipment if you win the job?
In most cases, you’ll need to provide the lender with evidence of your new business. A list of new customers, a copy of your new franchise agreement or a copy of the contract on which you plan to bid will probably be necessary. You’ll also need to be able to tell the lender exactly how much equipment will be required for your expansion, the types of equipment and the work each type does, and the pricing for each piece. To increase the probability and speed of approval, bring or submit copies of price quotes for the equipment you’ll need. This information helps the underwriter understand the specific type and amount of collateral that the financing will purchase. Believe me: approving a lease or loan for $2 million or $3 million is much easier when specific information about the equipment is close at hand.
Your justification and the rest of your information should be in writing, and to impress the lender with your earnestness, you’ll want to schedule a face-to-face meeting or at least a personal phone call. In these ways, you make yourself immediately available to answer questions about your existing business, your intended expansion and the equipment you need to make it happen.
Financials and Terms
At certain finance firms, if your financing needs are at or below $250,000, only a completed application is required. No other documentation is necessary. However, above $250,000, most lenders will require you to provide them with a full financial disclosure package. Your package should include tax returns for the past two years and/or fiscal-year financial statements of a reviewed quality. You’ll also need to include a current interim financial statement.
It’s also wise before meeting with a lender to have an idea of the financing terms that will serve your company best. Will a three-year lease or loan be sufficient, or would a five-year term work better, and if so, why? Another option to consider: Will you need to extend the start of loan or lease payments because your firm won’t get paid until 30 to 60 days into the start of your new business?
Many haulers want to match the terms of their financing with the terms of their new contracts. If this is true in your case, be sure to determine whether the life of the equipment you plan to buy justifies such a match. Also consider the pros and cons of 100 percent financing, and whether your credit rating is high enough to qualify for it.
On the other hand, you may have cash you can put down. But remember: there are often lots of startup costs involved in taking on a new route or a new contract, including the hiring of additional personnel, so your cash may be best used to pay for these expenses.
Bids and Pre-Approval Letters
One document required for bidding on a contract is a pre-approval letter from your lender. This letter states that you and/or your company are approved to receive up to a specific dollar amount of financing, pending receipt of final documents, for the equipment you need to do the work specified in the contract.
Be as specific as possible with your lender to ensure that he/she knows you are bidding on a contract and that the pre-approval letter must be provided along with the bid. It’s also important to be sure your lender understands that once your company wins the bid, final funding approval will be required within a matter of days. Your pre-approval letter should note that it is valid for a specific period of time that allows your company to purchase the equipment.
Because any part of the process might take longer than expected, start your search for financing at least 30 days in advance of the date your bid is due. Application-only leases and loans for $250,000 and under can often be approved in one day. Even leases and loans up to $1 million can often be approved in one or two days if all documentation is furnished. Larger transactions may take a week to 10 days to get financing in place, and if there’s any type of hiccup at all, it could take longer, so give yourself plenty of time.
You’ll need financing in place even earlier if you’re ordering new equipment. Certain specialty vehicles can take three to nine months to build, depending on backlog at the factory. But many times, municipalities will build in 12 months between choosing a contractor and the start of the project. Even so, you’ll want to have your financing in place to order the equipment you need.
Tips
Even if you’re a relatively small hauler bidding on municipal contracts, it’s wise to spend the money required to obtain CPA-reviewed financial statements. Most lenders will lend only up to a certain dollar amount for internally compiled financial statements. For this reason, having either “reviewed-quality” statements, or, as you grow larger, financial statements that are professionally audited each year, is important.
Also, when talking with your accountant, ask if you’d experience more advantages with a lease or a loan. Tax laws change and Congress decides near the end of each year whether or not to implement IRS Section 179, which grants certain depreciation deductions. Tax advantages between traditional financing and leasing can be significant, depending on the way your company is structured.
When shopping for financing, talk with several types of lenders to learn which one best meets your needs. Sometimes municipal packages require $10 million or more in financing, and some lenders may not be comfortable lending the entire amount. They may offer to provide a portion of the financing, which means that you’ll have to obtain the balance from one or more additional lenders.
When this is the case, a lender may tell you that he/she can finance the vehicles, leaving you to seek additional financing for the soft collateral. Don’t agree to this arrangement if it can be avoided. Insist that each lender involved finance a combination of vehicles and soft collateral. This is crucial to getting the best financing terms and interest rate. Containers, curbside carts, trash compactors and other auxiliary equipment are considered soft collateral. Other soft collateral could be recycling equipment, to be used in a recycling facility.
Even if one lender offers to finance the entire package, it’s wise to interview three or even four lenders to find the most favorable terms. Then go with your first choice, the lender with the terms that fit your needs, and obtain pre-approval for the amount he/she can lend. If the amount is less than the full package, contact your second choice and ask what he/she can do. Don’t “shot-gun” a deal by sending it out to several lenders at once, because doing so can damage your personal credit score.
It’s best to work with a lender who understands your business. He/she may be able to recommend new finance products or special terms that facilitate your cash flow. If you have proven track record, financing shouldn’t be a problem. But if you’ve been in business only three years or less, lenders will probably require a down payment. Even then, with a clean financial track record and good credit, you should be able to obtain financing on new equipment purchases.
If your credit is less than sterling, don’t give up. It’s not unusual for companies to have dings on their credit record, left from the Great Recession. If your record is free of bankruptcies, foreclosures and repossessions, and you have only what we in the business call “slow” credit, you should still be able to obtain financing as long as you can prove that your revenues have rebounded and you have cash flow. Your rates might be a bit higher than normal for a while, and a down payment may be required, but a good finance firm should be able to structure a transaction to meet your needs.
Getting Prepared
It is indeed possible to receive financing for your fleet expansion, even if your credit record contains imperfections. Before contacting one or more lenders, write down your reasons for needing to expand, and gather evidence of your new business or expected new business. Also, gather your firm’s last two tax returns and a current interim accounting statement. Ask your accountant whether a lease or loan would best benefit your tax situation and then talk with several lenders to determine which has the lowest rates and best terms appropriate for your business. If your first lender turns you down, contact a second, and then a third and fourth, if necessary, to obtain the financing you need. Be clear and direct in stating your needs, and furnish all documentation a lender requests. Then get that pre-approval letter and go to work acquiring the equipment you need and building the waste hauling business of your dreams.
Anne Eubanks is Regional Manager for Advantage Funding, Inc. (Lake Success, NY), one of the largest independent financing firms in the U.S. specializing in the vocational truck and commercial transportation industries. As a sales professional for a large national transportation finance firm, Anne works with transportation company owners every day to answer questions like these. It’s her responsibility to help customers get the financing they need to grow their businesses. Anne can be reached at (714) 231-2822 or via e-mail at [email protected]. For more information, visit www.advantagefunding.us.