If you are a hauler seeking to expand your business, you typically need to gain access to working capital to fuel your growth. There are several waste equipment financing options that you can use as a source of funding for expansion. Here I’ll explore the pros and cons of these options, plus suggest one additional method you may not have considered or realized exists.
Business Expansion Options
- Using a Bank Line of Credit
A line of credit is typically secured with accounts receivable and allows for interest-only payments that are less than amortizing loans. This can be beneficial when lacking immediate cash for unforeseen expenses. However, it is common for banks to review your line of credit annually. This process typically requires monthly reporting and your principal is due in full at the end of the revolving period which can be overwhelming when due.
- Using Paid-For Equipment
Using paid-for equipment for a term loan is easy if you’re dealing with a lender who is familiar with the value of your equipment. This option is typically paid back over a three- to four-year term with fixed monthly payments of principal and interest.
- Using Online Cash Advance Lenders
A relatively new source for accessing working capital is through an online cash advance lender. These loans can be the quickest and easiest to obtain but beware of some potential pitfalls. They often involve shorter terms (typically three to 12 months), interest rates of up to 40% or more, and require automatic payments drafted daily from your bank account.
When obtaining this type of loan, you often pledge all of your assets as collateral, and have little or no ability to modify the terms. Also, there is no incentive to paying off your loan early because often the sum of your payments, including interest, for the remainder of your established term will be charged if an early buy-out is requested. Once you get this type of loan, getting out is not easy, and it can often spiral out of control.
- Improve Cash Flow and Lower Monthly Payments with This Fourth Option
With any of the above methods for accessing working capital, there will be an increase in your monthly payment obligations. But there’s a fourth option that we can offer (to qualified companies) that you may not have considered or know about. In certain situations, it’s possible for you to access working capital AND improve your monthly cash flow. This involves refinancing an existing equipment loan(s) and using the equity in that equipment to obtain working capital. I’ll illustrate by using this chart to demonstrate an example.
Let’s talk through the steps of this process:This hauler’s original loan(s) was for two trucks for a five-year period, with an original amount of $450,000. It’s now four years into the loan(s), and the current balance is $110,000. This hauler has paid off $340,000, but the trucks have depreciated by $150,000 so there’s a current value on the trucks of $300,000. Typically, we loan about 80% of the current value, shown here as the $240,000 new loan amount. CCG pays off the remaining balance on the original loan(s) of $110,000, which leaves $130,000 cash for working capital to grow your business. The new loan is $240,000 on a three-year term with monthly payments of only $7,700. So, on a monthly basis, there’s $1,700 cash flow savings.
A Quick Process for Expansion Financing
An experienced lender that is familiar with the waste business can get this kind of loan processed and funded in as little as one week. Credit approval, inspections and lien searches are finished quickly if you are prepared to provide:
- Proof of ownership: invoices or copies of titles (if it’s a titled vehicle) for the equipment on the loan(s) to be paid off
- Monthly debt schedule, indicating the payoff amount and the monthly payment of the loan(s) being paid off
Kevin McGinn is Sr. Vice President – National Waste Division for Commercial Credit Group. Read the original article at https://www.commercialcreditgroup.com/blog/how-to-get-working-capital.