Equipment financing in the ‘new normal’
By Hannah SundermeyerJanuary 18, 2021
As we continue to navigate a Covid-landscape, it seems as if no market has endured without its fair share of challenges, especially when it comes to funding and leasing. But equipment financing is finally starting to gain some traction. We rounded up three industry experts to talk money, used equipment and fleet expansion.
Our annual Finance Forum features responses from Jeffrey Scott Whitcomb, vice president, Mitsubishi UFJ Lease & Finance, Commercial Asset Finance division; Tonya Fry, assistant vice president, Harry Fry & Associates; and Greg Johnson, assistant vice president, Commercial Credit Group.
With Covid-19 impacting equipment sales, how do you characterize the market for equipment finance?
WHITCOMB: A strange and interesting thing happened to the market as a result of the pandemic. Many of the large ENR400 contractors who do highways, roads, tunnels and bridges got calls asking them to speed up their work while there were fewer cars on the roadways. This acceleration in work drove demand for equipment. It also helped improve their financial results. We saw zero requests for payment deferrals from these companies. In the middle market and below, we did see an impact on their businesses and did see requests for payment relief. These were short-lived. We continue to ask for companies to provide a simple one page “brief” on the impact of Covid-19 on their 2020 results and their forecasts.
FRY: The market has trailed off slightly compared to 2019, but business has remained steady. Many customers were not affected by the shutdown due to being classified as essential industries. Customers continue moving forward with purchasing but remain cautious. Covid-19 has been a challenge in itself but this being an Election Year their cautiousness is compounded. We’ve had many customers with approvals in place but have elected to wait until the election is over. (This happens every presidential election year.)
JOHNSON: While the market for equipment sales was impacted at the beginning of the pandemic the market for equipment financing is improving. The market for Commercial Credit Group, a non-bank, independent equipment finance company, has presented opportunities to restructure existing debt, consolidate and refinance other lenders and occasions to provide working capital to companies needing to access their liquidity. These structures are less traditional finance arrangements than many banks and captives offer.
What are the challenges in financing equipment in today’s market?
WHITCOMB: I would not say that the challenges are different in today’s market. Banks and finance companies in general have “tightened” underwriting standards as they would in any recession or slowdown. I would also say that companies who asked for deferrals will see their credit ratings decline as a result and this is unavoidable. It happened to some of the largest companies in the world. It may be harder for small and mid-sized companies to obtain credit in the coming year, or, they may have to pay higher rates. Although the cost of “buying money” has decreased this has been partially offset by risk premiums being increased. Overall rates are lower today than they were a year ago for most customers but there are exceptions to that in the sub-prime category.
FRY: Credit due diligence and overall credit has tightened significantly but deals are still getting approved at normal pace. We believe the tightening is a direct response to Covid-19 deferral offerings to customers of three months to six months causing lenders to be increasingly cautious. Lenders in general, as everyone else, never imagined how a strong economy could collapse so quickly. Funding sources see companies doing well but very cautious going forward.
JOHNSON: Understanding your customers challenges and what they are seeing in their respective markets, understanding equipment values, understanding your customers long term goals, finance for the right term length and the Three C’s. Finding customers who have good character, good cashflow and good collateral.
Aside from low interest rates, are there any benefits to buying cranes, transport equipment and vehicles right now?
WHITCOMB: I am seeing some advanced buying or, jockeying for order slots for companies engaged in infrastructure. If Washington remains “gridlocked” that is ultimately not a good thing for our market. Executive orders can relieve the regulatory burden (and that helps the cost side) but true spending originates in Congress. I think if either party takes complete control of the legislative and executive branches, we will see action on infrastructure. I see all of my clients preparing for that work while trying to maintain financial flexibility. The value of leasing in the heavy equipment market now lies in the ability to de-fleet quickly if needed.
FRY: You are correct, the rates are low and there are the typical tax advantages, such as the Section 179 tax deduction, when purchasing. (We always encourage customers to check with their accountant regarding tax deductions). Timing wise, Q4 typically sees lenders aggressively pursuing loans/leases to add to their portfolios which may favor the borrower/buyer.
JOHNSON: A leading benefit to buying equipment that may need to be replaced due to age or obsolescence, for the remainder of the year, would be the continuation of Section 179 and Section 168(k) of the IRS tax code. In short, Section 179 allows eligible businesses to deduct the purchase price of qualifying equipment in the year it was put into service. Section 168(k) allows for bonus depreciation (100 percent expensing) on eligible equipment and property, thus allowing accelerated depreciation for a reduced tax burden. This creates a larger initial expense deduction than using a standard depreciation method, thus reducing tax liability.
What are the challenges with financing used equipment?
WHITCOMB: We have not seen any changes in the financing of used equipment. Used equipment values have fallen with the pandemic but have not fallen off a cliff. We have made no policy changes on the financing of used equipment.
FRY: Equipment availability has affected financing as well. The delays/shutdowns due to Covid have had serious impact up and down the supply chain providing materials to manufacturers. The used market has had a mixed bag of issues. Many crane owners are holding on to their equipment longer for the concerns previously noted which in effect impacts availability of used cranes. Conversely, due to the Covid conditions and the effect of demand for O&G many companies have shuttered their operations or reduced their fleets which can affect the normal market flow of used cranes. Overall, the used equipment market is strong, but the right equipment may be difficult to locate.
JOHNSON: The used equipment market has remained resilient. We have seen used equipment values remain strong while supply chains for new equipment were interrupted. Current Equipment values in today’s market is a key component to how we lend. The answers are in the details of the equipment we are looking to finance and essential to our lending process. CCG does a good job of understanding the life cycle of a particular asset and the real market value of a piece of equipment. This process can free up equity that might not be reflected on a balance sheet.
What advice do you give to equipment owners needing to update their fleets but still reluctant to make a big purchase due to the instability of the market?
WHITCOMB: We think that the trend to rent more equipment will continue. Rental companies have gotten much better at offering additional services that help contractors. We see greater and greater value placed in technologies that help manage risk. We also see a greater reliance on robotics to increase labor productivity. We think that trend will continue. I would advise companies to encourage their fleet managers to take advantage of this trend by looking at an optimal blend of debt, operating leases and monthly rentals.
FRY: Plan your work and work your plan! This may sound simple and elementary, do I need to replace a crane in the fleet or, am I looking to add a crane to the fleet? From a finance perspective replacing is easier in the lenders mind’s eye. A lender sees it as replacing a crane, even though it may technically be an upgrade. We have worked with crane owners for over 25 years, and just about every owner knows exactly why they want a particular crane. They understand the risk in additional debt. However, lenders are cautious and risk adverse by nature and prefer to understand your reasoning for the purchase. A little advice is to have patience with lenders questions and details that can be relayed.
JOHNSON: Find a lending partner such as CCG that has the stability to endure the business cycle with your company and one that has a proven history of working with their customers during challenging environments. CCG is good at finding cash flow conscious solutions in challenging times which could include refinancing existing debt and rolling into a new purchase that will improve overall cashflow.