By Rod O’Connor
Those considering equipment upgrades should be aware that many lending sources once prevalent are now exiting the truck financing business to pursue more profitable industries; many that stay in the truck financing game don’t fully understand how the industry’s business cycles can impact cash flow needs.
“Working capital is a small business’ lifeblood,” says Trish Reed, VP Marketing and Customer Service for Navistar Financial Corporation, the financing arm of Navistar International. “Business owners need to ask themselves: Will my current lender be available to provide capital for growth or emergencies in addition to purchasing new equipment and under what stipulations?”
Captive delivers secondary financing source
The most successful businesses identify as many sources for funding as possible. It’s the law of credit capacity and risk. “Put all your eggs in one basket, and you may find yourself at a disadvantage when you read the fine print in your retail banking agreements,” says Bill Salomone, Vice President, Nalley Motors, a truck dealership in Atlanta, Georgia.
For those who traditionally finance trucks through their local bank, now might be the time to consider captive financing.
“To maintain proper liquidity, it’s a good idea to find a source that will provide capital to draw from for growth or emergency situations, and use your dealer’s captive finance sources for truck equipment purchases,” according to Mike Brasfield, Business Manager for Mid-America International.
A captive financing company is owned by a manufacturer to finance dealer inventories and offer loans to customers interested in purchasing a particular company’s products. Because captive financing firms focus on a single industry, they typically know that industry’s unique challenges and business cycles better than other lenders.
“For those whose primary business is not transportation, we recommend they preserve their working capital through their bank for emergency situations,” adds Reed. “When it comes to equipment purchases, many companies go with a secondary source because, if their business goes through financial difficulty, their loss consists solely of the equipment itself and not the other business assets.”
A secondary line of financing is especially important for small businesses because banks will typically have liens on business-related equipment or personal assets such as a home. Or, some banks may cross-collateralize all the trucks in a customer’s fleet if he or she falls behind on one of their payments—essentially grinding a customer’s business to a halt at the worst possible moment.
Ask the right questions
It’s always best to check with a tax advisor to identify how specific business needs will impact financing decisions. While many small businesses rely on the tax benefits of owning their vehicles outright, other companies turn to full-service leasing options to establish more consistent monthly expenses (see sidebar).
Regardless of the financial product you choose, businesses investing in new equipment can sidestep hidden fees by asking a few simple questions upfront, such as: How quickly will I receive funding? How long will you hold my title after payoff? Are there any early payoff penalties? And, what service fees may be incurred in addition to rate?
Finally, remember to always bring your completed credit application, tax returns and financial statements to any meeting with your lender. You also may want to include a copy of your business plan. “It’s always beneficial to provide as much background as possible,” explains Reed. Be prepared to answer questions about how the trucks in your fleet impact your business’ overall financial picture; lenders are typically interested in the profitability of your routes, the type of freight you haul and how these factors affect cash flow.
But beyond the numbers, you should think of the meeting like a job interview and emphasize goals and positive benchmarks. “You want to be able to tell the story of your business,” Reed continues. “The more we know about your business, the better we can accommodate your specific needs.”
For more information on truck financing options, visit www.navistarfinancialonline.com.
Ownership vs. Lease?
Navistar Financial Corporation offers the following breakdown of the most common vehicle financing tools available for the small business owner.
- Debt structure ownership – Essentially a simple-interest loan, it allows funding for truck-related equipment and features customizable components like term, rate, payment frequency, down payment or balloon (a large, lump-sum) payment.
- TRAC structure lease – This tax-oriented lease reduces monthly payments by applying the lessor’s tax benefits to reduce interest costs and uses a balloon payment to reduce the amount of principal repaid. At lease termination, the lessee purchases the equipment. When you want ownership, but other lines of credit are limited or unavailable, a TRAC lease may make the most sense for your business.
- FMV (Fair Market Value) lease – When a business simply wants the use of equipment without ownership, a FMV lease is typically the smart option. Here, the customer’s monthly payment covers all interest costs for the term, as well as the percent of the equipment’s value that is ‘used up’ during the lease.
- Full-service maintenance leases – National leasing companies like Idealease, Inc. provide full-service contracts bundled with an FMV lease described above. The Barrington, Illinois-based company suggests full-service leasing when setting straight line budgets is a concern. With a shortage of technicians, full-service maintenance contracts are also a good way to ensure asset utilization is at its peak.
Don’t tie up your bank credit lines with trucks. Use that line of credit for emergency cash flow for your business.
- Watch for hidden costs like excessive documentation fees or closing costs. Some lending institutions design equipment transactions like home mortgages, assuming consumers will expect to pay those fees.
- Ask about lease turn-in fees (fees that lenders are charged by equipment inspectors and passed on to customers and are different from paying for terms and conditions).
- Beware of excessive mileage overage fees. Some light duty manufacturer lenders charge as much as 15 cents per mile for going over the mileage limit. (Navistar Financial charges seven cents per mile.)
- Some lenders may offer lower rates as ‘introductory’ but the next time around, they’re either not in business because of an industry downturn, or will increase rates significantly. Find a lender with fixed rates that remains consistent so credit capacity will be there during down cycles.
- Check bank deposit agreements and what liens are being placed against what assets for every loan. When financing a truck purchase through a bank, liens may be placed on your business or even your home. In some cases, the bank reserves the right to withdraw funds from other accounts on deposit with them if they suspect you may default on the loan payments.