Highway Contractor

| July 1, 2010

Step it up

Buying, leasing or renting: now is a good time to work an equipment deal using one, two or all three in the mix.

By Mike Anderson

Before even addressing the options available to their customers, construction equipment financiers are just relieved to have customers to speak with, given the turtle-like crawl of the market the past two years.

And that leads to good opportunities right now for those earth movers and road builders ramping up to add to their fleets.

“If you have the need for construction equipment, you have good options in all three channels – in rental, leasing and long-term financing,” says John Crum, senior vice president of Wells Fargo Equipment Finance’s construction division. “It’s a good time to be thinking about what to do with your fleet right now, because you do have these options available to you … and the cost of capital is down.”

With 12,000 U.S. customers in the defined infrastructure space alone, Wells Fargo deals “from the equipment manufacturer down to the guy who’s putting the stone down on the roadway,” says Crum. “It’s a core industry for us. We do hit three channels – we go to the manufacturer space, to the dealer space and then direct to the end-user space – and we think that provides us a degree of diversity. And then the national and Canadian coverage gives us some geographic and regional economic diversity as well.

“There’s certainly money available from us, and we don’t lack competition. We’re seeing more lenders get their legs underneath them a little bit,” he says, “and I think a lot of people feel generally that while the fog isn’t totally gone, it is starting to lift. People are starting to feel a little moreconfident, both from a lender’s and an end-user’s perspective. End-users are starting to think about the composition of the fleet.”

Among that competition Crum refers to are the major manufacturers of theactual equipment financed by Wells Fargo and other independent financial services companies.

“Business in the core construction segment is definitely starting to pick up, and that’s a great sign,” says Ben Norris, vice president of financial services and treasurer for Komatsu America. “Whether that means we’ve found a firm bottom and people are getting their feet back under them again and are ready to run, or there actually are some signs of a true recovery, I’ll leave that to the economists. But the key point there is things have stabilized, demand has picked up, we’ve got our plants in the U.S. back at work and producing machines, and there are pockets of real good activity out there,” says Norris. “As a captive, we never went anywhere. We were strongly supporting our dealers, strongly supporting our end-user customers, and never did face a financial or banking crisis. However, the backdrop of the market was such that those forces were very real.”

According to state filing results compiled and projected by Equipment Data Associates [a Randall-Reilly company], based on Uniform Commercial Code (UCC-1) financing activity, the total of new and used machines for March surpassed the 10,000 mark for only the fourth month since 2008.

“Our doors are open,” says Well Fargo’s Crum. “We lent a lot of money yesterday, we’ll lend a lot today, and we’ll lend a lot tomorrow.”

 

Choices, Choices

So, you’ve finally gotten some work ahead of you. Now you need some gear, maybe a couple of full-size excavators, a wheel loader, four articulated dump trucks, a pair of rollers and a paver.

 

“We’re at a particular point in the business cycle and the economic cycle where rates are very advantageous to a contractor to go out and put some long-term financing in place right now.

At the same time, with manufacturers wanting to sell their products, there are also manufacturer-sponsored

programs that are offering some really attractive finance and lease options out there as well. It’s a good time to do all.

— John Crum, senior vice president of Wells Fargo Equipment Finance’s construction division

 

You, too, have choices. And while different companies and different manufacturers may offer similar wares, they are not by any means all alike, which means you need to ask a lot of questions. Assuming one manufacturer or bank offers a carbon copy of their competitors’ bill of fare is a mistake that could leave you unaware of a option that fits you better.

As vice president for U.S. construction financial services for one of those major equipment manufacturers referred to earlier, Mike Rankin can lay out a number of options. “Volvo Financial Services offers a full spectrum of finance and lease offerings, including flexible loans that can be customized to customer business needs and resources, special program offers and competitive rates,” says Rankin, citing such options as accelerated payments, skip or seasonal payments, balloon payments and simple interest loans. “Unlike some lenders, Volvo Financial Services does not penalize customers for paying off all or a portion of their loan before it’s due. Volvo Financial Services also understands the cyclical nature of the construction industry and will work with customers to design a plan that matches their cash flow, with terms ranging from 24 to 60 months.”

Among the benefits of a loan for the customer, says Rankin, are the actual ownership of the asset, the quick building of equity, and the tax depreciation with no hour limitations or return conditions.

“It’s interesting,” says Komatsu’s Norris, “because leasing gets probably more press, but the cornerstone customer in the U.S. and Canadian market still likes to own their core fleet, and then they’ll add to that core fleet through rental or leasing packages that are available.

“There are benefits to ownership, unless you overdo it. Our friends at the IRS still allow accelerated tax depreciation, so unless you overbuy, or are in a situation where you are being penalized for too much benefit if you will, there are still some advantages to owning that machine,” says Norris. “I think customers like the uncertainty removed from any transaction. If they can get the machine they like and their operators are happy with, they’re familiar with the product line, and they trust and have a good relationship with the distributor, it does make a great deal of sense to buy. And then as you want to add to that fleet, perhaps do it through leasing or in many cases just rental.”

With its Fair Market Value, Fixed Purchase Option, Finance and Options Plus leases, Volvo Financial Services offers leasing products that provide a variety of turn-in options, says Rankin.

The exit window, explains Komatsu’s Norris, is an advantage to leasing for the customer. “With a good track record and credit profile, you can get into the machines for lower up-front costs, perhaps match those machines up with a job or a duration of a job or project, and then when that project is over, you may still choose to purchase the equipment or you may decide, ‘OK, I’ll give it back and look for the next opportunity.’ ”

At Wells Fargo, Crum notes “significant movement” of customers to a third route as they consider how to add equipment. “The activity is much more heavily centered right now than it has been in the past on the rental side of the business,” he says. “Our end-user contractors are telling us that the first move they’re making as they’re getting some more work and looking at their fleets is that they’re going to rent in the second and third quarter this year, and then maybe make the long-term decisions in the fourth quarter. And dealers and manufacturers are also reporting significant increase in demand on the rental side of their business. For the dealers, their rental fleets are having very strong utilization right now, to the point where a number of dealers are looking at adding to their own rental fleet to meet the demand. Ultimately, the hope of the seller of equipment is that they will then convert that rental to a purchase at some time later in the year or next year.”

Again, flexibility is a carrot for end-users. “They can use the equipment for a period of time, and can then decide on what they want to do at some point in the future,” says Crum. “A lot of traditional dealers will allow them to apply some piece of their rental towards a conversion price of the machine, if they choose to do that. I think, just right now, people are at the stage that they want the flexibility that if it doesn’t work out long-term, they can return the equipment really at any point to the traditional renting dealer without any long-term obligations.”

Secondarily, he adds, dealers and rental companies wanting to put the machines in their fleets to work are keeping rental rates competitive right now.

Sums up Volvo Financial’s Rankin: “Blending of the options is often a smart move as it allows the customer to address specific needs for the various types of equipment on a big job and optimize profitability.”

 

Doing the Deal

Much like the equipment they use, where to find the money for that equipment may involve digging into different pots, in different locations. After all, a guy who operates nothing but Brand C excavators may just have a preference for Brand D backhoes, right? Then again, when it comes to finding the money, that may not matter.

“That customer, maybe more than ever before, is, to the extent they can get it, looking for kind of a one-stop shop,” says Norris. “That’s where they want that dealer to be able to provide solutions that meet their total business, and not have to do an a la carte type of solution.

“As Komatsu Financial, we’re very interested in helping our dealers and their end-users be successful,” he says, “and so we will finance on occasion some non-Komatsu product when it’s included in a package of our own. But we stop short of doing other manufacturers’ product on a stand-alone basis for obvious reasons. We are not an independent commercial finance company; we’re first and foremost to support our product line and our dealers.”

Step right up then, Wells Fargo’s Crum urges end-users, the overwhelming majority of whom his company serves are from the private sector. “The conservation of their working capital is the biggest thing,” he says. “We’re at a particular point in the business cycle and the economic cycle where rates are very advantageous to a contractor to go out and put some long-term financing in place right now. At the same time, with manufacturers wanting to sell their products, there are also manufacturer-sponsored programs that are offering some really attractive finance and lease options out there as well. It’s a good time to do all.”

Doing all today, says Norris, includes a heavier consideration of used equipment. “For our types of products, the obsolescence curve is very long and very flat,” he explains. “If it still moves dirt or moves down the highway, there’s value there, and I think you’re seeing that today in used equipment. There’s been some real interest in used machines, just because of that price-to-value ratio and a little bit less uncertainly. Customers are more willing to commit and have to deploy less capital.

“This may be a function of the economy as well, because many of the folks in our space have gotten a great deal of machines back, and you have to work that back through the traditional channels,” says Norris. “You’re certainly seeing that through not only the other captives, but commercial finance companies and banks. Unfortunately a lot of businesses failed and a lot of iron had to come back and is still in the process of being moved through the pipeline. Until that has run its course, it’s going to be a little bit harder from the manufacturer perspective or dealer perspective to convince customers that they want to ignore half of the bell curve and only look to buy or rent new products.”

Whether a company makes the equipment or not, it definitely has a wicket at the proverbial bank for equipment users, says Norris. “From a capital market or pure treasury perspective, we love other financial institutions to have interest in our industry and our space,” he says. “It’s a very capital-intensive business; manufacturers require capital, dealers require capital and the end-users require capital. Informed market participants who want to engage funds, we’re happy to talk to and in some cases even point them in the right directions. Unfortunately, what you get sometimes is the cyclicality of our industry will attract participants during some periods, and at times others will run for cover when things get tough.”

Despite the recent struggles, the construction industry retains “attractive features for us as a lender and lessor,” says Well Fargo’s Crum. “One of the reasons why this is a core business is because it is a very capital-intensive business. There is the need for the kind of service that we provide, which is capital, either in the form of capital to the dealer or capital to the end-user.”

Step right up, indeed.v

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