Turning To Alternative, Independent Equipment Financing Options

A look at what banks, brokers and vendors don’t offer.

Mnet 194392 Equipment Financing
Michael BeharMichael Behar

As the lending climate has shifted, it has come to light that financing has been dominated by larger institutions with more rigid lending terms. However, with ever-changing business requirements and technological advancement, financing equipment at a frequent schedule can lead to a high demand in seeking the most flexible and efficient financing options available. With this in mind, turning to independent lenders, can give savvy customers an edge.

When leasing equipment in the short-term and deciding whether to buy new rather than used equipment, it only makes sense to contact an independent firm. It’s become apparent that the trend is now shifting towards smaller institutions for the utmost flexible term options.

The advantages when choosing an independent financing firm over larger institutions such as banks, is availability of flexible trade-up programs. As an independent equipment financier, we have a proven 29-year track record in offering assistance in balance sheet management, providing terms that meet covenant requirements, and placing UCC filings only on the financed equipment requested.

Today’s Trends - Technology Equipment

According to ELFA, technology equipment represents the second largest sector assisting in the flow of new business volume in the United States. The ELFA’s Monthly Leasing and Finance Index, which reports economic activity from 25 companies representing a cross section of the $1 trillion equipment finance sector, showed their overall new business volume for August was $7.8 billion. Financing and leasing technology upgrades can lead to increased productivity, and flexible technology equipment leasing terms can improve your bottom line.

A Snapshot Into an Equipment Financing Transaction

A recent transaction for us involved a large service provider to the power and communication industries that was seeking financing on a fleet of trucks. Speaking to some of the complexities of this transaction, this client typically used TRAC leases in order to finance their fleet given the ability to buy or sell the equipment at the end of the lease. Yet, that of course comes with a shared risk as there are usually expectations relative to the use and remarketing of the equipment. In this case, the customer did not like the cumbersome and restrictive usage guidelines of a TRAC lease along with the costs associated remarketing their equipment at the end of the term.

To solve this, we provided end of term options that offered the customer the ability to either purchase the equipment at a set residual, or have either a reseller or the original vendor buy the equipment directly, all without usage guidelines or costs associated with the remarketing of the units.

This recent transaction underscores the state of the current equipment financing environment and highlights the need for flexible terms and freedoms in financing.

Banks do not offer these services. With covenants in place, limitations are put on your company that can curb potential expansions and restrict business and revenue targets. Covenants prevent the borrower from engaging in certain activates — they limit the borrower and are put in place by lenders to protect themselves from borrowers defaulting on their obligations. Covenants are often represented in terms of financial ratios that must be maintained.

When equipment is leased, both assets and liabilities on the balance sheet increase, accruing additional support and responsibilities. Finance lease expenses are allocated between interest expense and principal value much like a bond or loan; therefore, in a cash flow statement, part of the lease payments are reported under financing cash flow.

100 Percent Financing

Offering the freedom of 100 percent financing with no down payment required can be a main differentiator in retaining a lessors’ clientele. One hundred percent financing gives you the peace of mind that your equipment and any other additional soft costs associated with the project, including freight, training, software and consulting charges.

What businesses may not know is that choosing an independent financing firm can offer unique options that could heavily benefit middle market companies with the best incentives. For instance, independent financing firms cut the middle-man out a transaction by giving clients the ability to choose their vendors, ushering a flow of business on both ends.

We have been in contact with an OEM auto manufacturer in order to finance their equipment purchases. The customer was looking to upgrade their facility to manage an existing contract with two large auto manufacturers. The transaction included purchases from two facilities in two separate states. The ramp-up period had a six to nine-month lead time, with the majority of the equipment having already been purchased. The competitor on the transaction was tied to a large regional bank, and like most banks, they leveraged lease financing or commercial lending as a means to increase or take over the customer’s entire banking relationship. This standard practice makes sense from a bank’s perspective, yet it does not always benefit the client. Customers enjoy the freedom to bid out projects, yet they obviously would prefer to accept bids that carry no further obligations.

A majority of the leases that independent financing firms offer are simple one-off transactions, which gives the customer the full flexibility to finance a specific project with no additional obligations. By using a independent financing firm, the customer is able to increase their borrowing power without compensating or negatively affecting their existing bank relationship.

Michael Behar is Senior Vice President of Jules and Associates.

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