s a f e t y   &  o p e r a t i o n s

Equipment Finance

Good Deals For Good Customers

PATRICIA SMITH
SENIOR EDITOR

      Lenders are wary, but also eager to do business with well managed companies.
      It's enough to scare off any lender. According to investment analysts at A.G. Edwards & Sons, over 4,000 carriers with five or more trucks closed their doors last year. In 2000, over 3,600 trucking companies went out of business.
      Transportation Technical Services lists 22,000 trucking companies in its 2002 National Motor Carrier Directory, including 2,400 new carriers. The 2001 directory listed 27,000 carriers.
      "Regrettably, trucking has lived up to its reputation for the highest incidence of bankruptcy of any industry," says TTS Executive vice president Ron Roth.
      There aren't comparable exit numbers for finance companies, but when fleets began to crumble many lenders made a mad dash for the door. To date, there aren't any signs that they're rushing back.
      "It's a tough market," says Jay Fudemberg, CEO of Pure Markets Inc., an equipment finance consultant that specializes in multi-million dollar deals. "Even larger organizations are finding banks pulling back from revolvers and short-term finance, and rates have clearly gone up."
      On the other hand, "it's a great time to be borrowing for somebody with a strong balance sheet," says A.G. Edwards transportation analyst Donald Broughton.
      Lenders hate to throw out rates, but 7%-10% for "credit worthy" buyers seems to be the popular ballpark range. Truck manufacturers looking to move inventory are willing to go much lower.
      Through March, International Truck & Engine is offering a 0% first year interest rate or an effective 4.71%-5.1% (depending on the contract term) for qualified buyers.
      Volvo Commercial Finance will go as low as 4.99% APR on new VN or VHD models delivered before the end of April — and even throw in $1,000 worth of parts and service.
      On the used truck side, manufacturer-owned or affiliated finance companies continue to toss out carrots like 100% financing and "new truck" rates.
      Independent finance companies say they're not going to get into a bidding war with the truck builders.
      "We're trying to approach the market intelligently, which allows us to be in it for the long term," says Scott Rhodes, managing director, Wells Fargo Equipment Finance.
      What they will do is offer a choice for equipment buyers who want specifications or terms not available through the manufacturers' programs. And, once the economic dust settles, we'll likely see lenders courting less-than-perfect credit risks — at higher interest rates.
      While they're being selective, finance companies are also looking for safer ways to lend money to high risk customers. One example: carrier-sponsored lease/purchase programs for owner-operators.
      Dealers and used truck sellers say the chance of getting affordable financing for a first truck is slim to none, especially if the wannabe owner-operator doesn't have much capital to invest.
      Instead of walking away from the market, Wells Fargo is "accessing the owner-operator market at the carrier level," says Rhodes. "This is a way we can stay committed to the market and find another way to provide capital to the industry."

Getting That 'Best Deal'
      No matter how tight financing may be, experts say a few basic steps can make a big difference in the deal you get.
      Spotlight your management skills. The fact that you survived the recession is laudable, but lenders want to know how.
      "We want to see how the management team has performed through the downturn," says Steve Rohrbach, another Wells Fargo exec. "We want to see their operating plan, their strategy in dealing with customers, how they handle things like rising insurance costs and fuel prices."
      Hauling contracts are a huge plus for large and small fleets, Fudemberg says.
      "You've got to try to find the strengths of your business . . . your prospects for earnings . . . and make sure you have a compelling case as to why you can pay back a loan," he adds.
      Know what you can afford. Find a payment you can handle in slow times as well as good ones, advises Rohrback.
      Also keep in mind that lenders can structure loans to meet unique operating needs. For instance, if your business is cyclical, ask for a contract that gives you reduced payments during typically slow times.
      Pay down existing loans. If you owe more on your current equipment than you can get in sale or trade, concentrate on paying down the loan until you are at least close to an equity position, advises Doug Perryman, U.S. Truck Source, Kansas City.
      Starting in October, heavy duty diesel engines will have to meet stricter emissions standards. Many speculate that concern regarding their performance will spark a run on late model highway tractors. If that happens, resale values for 1999-2001 models could improve some, says Perryman, resale on older models is about as good as it's going to get.
      Choose the right equipment at the right price. Determine what you need before you start looking for financing. Many special programs are limited to certain models or specifications, which means you could end up paying for options you don't need.
      Once you've determined the right specifications for your operation, check the Truck Blue Book, the N.A.D.A. Official Commercial Truck Guide, or the numerous Internet truck sales sites to determine a price range that's fair.
      Shop finance sources. Dealers almost always have several finance sources and should be able to offer some choices. Local and regional banks are reportedly becoming more aggressive, especially when it comes to doing more business with established customers.
      One of Pure Markets' services is for big fleet clients worldwide using the Internet. Many dealers and finance companies now take credit applications online.
      "There's a lot of funding sources out there that you might not be aware of," says Fudemberg. "Getting quotes online saves a lot of time and money."
      Don't get hung up on interest rates. Low rates can come with inflated purchase prices for the equipment. Finance experts also warn of high processing fees and huge penalties for early repayment.
      Sellers may offer incentives more valuable to you than the special interest rate. For instance, International buyers can choose $1,000-$2,000 in parts and service in lieu of 0% first year financing.
      When comparing programs, look at the purchase price of the truck, warranties, and maintenance plans. Also compare monthly payments and finance charges, including interest and all fees, over the full contract term.
      Don't forget leasing. For some companies, leasing is a good choice. Most deals require little cash up-front and off-balance sheet financing preserves borrowing capacity.
      You can get lower payments if you're willing to share at least part of the residual risk but, as we've seen during this current used truck glut, there are certainly advantages to being able to walk away when the contract is up.
      And while leasing is typically thought of as an option for over-the-road equipment, some finance and leasing companies now offer special lease programs for construction and other vocational trucks.