Equipment Finance Advisor assembled its first Lessee CFO Roundtable to provide readers a unique view of the equipment finance decision from “the other side of the desk” – the lessee’s perspective. In this roundtable discussion, we sat with the chief financial officers of three companies with significant equipment capital expenditure budgets to gain an understanding of what drives the decision to choose one lessor/lender over another, what factors influence the long-term success of a lessee/lessor relationship, and how these CFOs experienced the borrowing environment over the past five years. The following three interviews provide insights from three diverse companies and industries.
• A regional construction company
• A national over-the-road transportation company
• A national motor coach operator
Each interviewee was provided total anonymity at their request.
Among the many things we learned from these conversations, one thing is certain – one size does not fit all. The factors that ultimately drive the choice between lessors/lenders are as diverse as these companies and industries themselves.
Please feel free to read these three interviews in any order you prefer.
CONSTRUCTION COMPANY
Company Profile:
• Northeast-based construction company operating throughout the east coast
• In business 25+ years
• Annual revenues between $50 million - $100 million
• Annual capital expenditure budget = $20 million - $30 million
Equipment Finance Advisor: When determining which lessor/lender to utilize for your equipment financing needs, what are the most important factors you consider – qualities a lender must bring to the table (other than a competitive rate) to not only win your business, but retain it?
Chief Financial Officer: A competitive rate is important of course but leaving that aside, in our case, ease of documentation is a significant determining factor. That is critical. Putting a master lease or loan agreement in place with easy to complete schedules is important to us. Secondly, a local representative with whom we can work with is very important. All the lenders we work with in both banks and commercial finance companies have field representation. Third, the lender must be committed to the construction industry long term. We have seen a few large lenders leave the construction sector over the years and we will not work with them now that they have returned to the sector. We simply will not do business with them even if they come with the best rate, because they have not been consistent players within the construction industry. For years, one of the largest commercial finance companies was one of our primary equipment lessors. Then when the industry downturned, they left the market. Today, we do not do business with that company even though they continually attempt to win our business and present a very aggressive rate. Again, a competitive rate with acceptable terms is very important, but in our case, it’s not just about the rate.
EF Advisor: Does equipment expertise play a role in the decision making process when you seek financing for a specific type of equipment?
CFO: No. In our case, equipment expertise is not important as most lenders seem to understand the construction industry – it’s not specialized equipment. However, I do know many borrowers in specialty industries who believe equipment knowledge is critical.
EF Advisor: What role do captive finance companies play in your equipment financing plans?
CFO: We don’t work with captive finance companies. Frankly, captives are not that easy to work with from my experience. I get the feeling that if you can get the financing independent of the captive finance company, they are just as happy selling the equipment without retaining the financing. From my experience, the captives save their lending capacity for those companies that need a little extra massaging to make a deal work. We are a strong credit and haven’t done a deal with a captive finance company in years.
EF Advisor: Did your company pull back on the purchasing of new equipment during the height of the recession and utilize equipment longer than your typical practice?
CFO: We slowed down buying additional equipment a little at that time. As a company, we don’t wait until equipment is falling apart or causing maintenance downtime to replace it. So, our replacement schedules remained relatively unchanged during the recession.
EF Advisor: Have new entrants seeking to finance equipment such as community banks been calling on you, and has this activity increased over the past few years? Have any of these new entrants been successful in winning your business?
CFO: Yes, community banks have been calling on us more and more over the past two years. But they have not been successful because when we disclose the financing structure we require, it always seems to fall apart. They show a tremendous amount of enthusiasm on the initial visit, and then we never hear from them again.
I think the issue for community banks is that they are looking for a broad relationship – they want a depository relationship as well as a lending relationship. When we tell them that we don’t need any additional services or working capital – rather, we only require equipment financing, they seem to disappear.
EF Advisor: Do you utilize tax lease products at this time or did you at one time?
CFO: No, we have never utilized tax lease products. There’s nothing wrong with tax lease products, but in our case it’s a matter of company and personal philosophy.
EF Advisor: How did you view the lending market in 2008 through 2010 – were there fewer lenders calling on you versus what you saw in 2012 and now see in 2013?
CFO: No, we actually saw more lenders during those years because we are a strong credit. At that time, lenders all seemed to want a bigger piece of the action. We utilize a variety of lenders and determine how much financing we wish to do with each particular lender annually. So if we traditionally finance $3 million to $5 million annually with a particular lender, we maintained that level even during the recession – despite being offered more availability.
Interestingly, many of them provided us with larger equipment lines than we needed in hopes that we would finance more equipment with them. And despite telling these lenders our plan to only use them for say the $3 million to $5 million annually, some went ahead and approved us for a $10 million line, but we never used it. This happened during the recession and still happens today.
EF Advisor: Do you think CFOs in the construction industry are concerned about the effects the proposed changes to the FASB lease accounting rules could have on their financial statement presentation?
CFO: I think all equipment purchasers should be concerned, but I don’t think middle-market companies are educated on the potential impact. But they need to be educated on it. The big companies in the Fortune 1000 are paying strong attention to it, but I think most construction companies with revenues of say $500 million or less aren’t paying enough attention to it.
EF Advisor: What is your outlook for the construction industry in 2013 and into 2014?
CFO: The construction business has picked up and will continue to do so. Perhaps I am being influenced by the spring activity which is stronger than the activity we saw in the spring of 2012 and 2011. I am cautiously optimistic for the construction industry.
TRANSPORTATION COMPANY
Company Profile:
• Midwest-based over-the-road transportation company operating nationally
• In business 30+ years
• Annual revenues over $200 million
• Annual capital expenditure budget = $30 million - $50 million
Equipment Finance Advisor: When determining which lessor/lender to utilize for your equipment financing needs, what are the most important factors you consider – qualities a lender must bring to the table (other than a competitive rate) to not only win your business, but retain it?
Chief Financial Officer: Because we are a large company, we have a fairly sizeable bank group whereby we have a credit agreement with multiple banks participating. And we try to give as much business to those banks as possible. So the first cut always goes to the banks in our bank group. But within this bank group, the banks must possess equipment leasing expertise in order to finance equipment with us. Every year we run a competitive bid and send an RFP to all the banks in our bank group that provide leasing services. It’s very competitive as you can imagine, and the first cut is based on price (rate), but just as important to us are the back-office capabilities of the equipment lender. Ease of doing business from a contractual standpoint is important to us.
EF Advisor: Does transportation equipment expertise play a role in the decision making process when you seek financing for equipment?
CFO: No. Equipment expertise is not important to us. Transportation equipment is pretty standard equipment and most lenders understand our industry well.
EF Advisor: What role (if any) do captive finance companies play in your equipment financing plans?
CFO: Captives really cannot compete with our bank group so they are not considered as a viable financing option for us. We rarely hear from them as they know our pricing requirements.
EF Advisor: How important is the relationship with the lender’s field representative in determining which lender will be used for a particular financing need?
CFO: The field representative is really not that important to us. For us it’s more about the financial institution and its reputation. We are assigned a leasing representative in many cases and we are happy to get to know them, but from our standpoint it’s more about the long-standing relationships with the banks and commercial finance companies that have been with us for quite some time and demonstrated loyalty to us. And we are, in turn, loyal to them. So it’s not the leasing representative but rather, the financial institution and the quality of their product.
EF Advisor: Did your bank group lose any participants through the recession and did the loss of any member of the bank group ever cause your company any equipment financing issues?
CFO: There were just a few that did not return to the bank group. But none of the banks that remained in our bank group ever failed to fund us. So the recession never really caused us any funding issues.
EF Advisor: Did your company pull back on the purchasing of new equipment during the height of the recession and utilize equipment longer than your typical practice?
CFO: Yes, we pulled back on new capital investments during that time, but not to a great scale. Our delivery volumes declined in 2009 and 2010, so during those periods, if the equipment leases were coming to term, we would buy the equipment (as we normally do). But we did run tractors and trailers longer than was typically the case in prior years.
EF Advisor: Do you typically return the over-the-road equipment in at the end of lease term or purchase it?
CFO: We typically purchase the equipment at the end of lease term and then sell it in the used equipment market ourselves. It works better for us as we have a very strong feel for the used truck market and typically either come out whole or with a small profit on an equipment sale. And we have been doing that for years.
EF Advisor: Does your company utilize tax lease products at this time or did you at one time?
CFO: Yes, we utilize TRAC leasing exclusively as a lease product for our over-the-road equipment and have for many years.
EF Advisor: Do you think other CFOs in the transportation industry are concerned about the effects the proposed changes to FASB lease accounting rules could have on their financial statement presentation?
CFO: I can’t really comment too much on other companies and their understanding of the rules. But I can tell you that we are paying attention to the changes and their potential impact.
EF Advisor: What is your outlook for the transportation industry and economy in 2013 and into 2014?
CFO: I am cautiously optimistic for our industry. I think we are going to start seeing some improvement in the overall economy, but I don’t think it will be robust. I think it will be a little better than slow … better times are ahead.
MOTOR COACH COMPANY
Company Profile:
• Midwest-based motor coach company operating nationally
• In business 20+ years
• Annual revenues between $25 million - $50 million
• Annual capital expenditure budget = $5 million+
Equipment Finance Advisor: When determining which lessor/lender to utilize for your equipment financing needs, what are the most important factors you consider – qualities a lender must bring to the table (other than a competitive rate) to not only win your business, but retain it?
Chief Financial Officer: A lender must provide a competitive rate and acceptable contract terms as you can imagine, but that is not our primary concern. Equipment expertise and a deep understanding of our industry are very important to us. Having a specialized equipment finance arm that is well familiar with our industry and the issues we face is critical to us in choosing a lender.
EF Advisor: How important is the relationship with the lender’s field representative in determining which lender will be used for a particular financing need?
CFO: Our relationship with the lender’s field representative means a lot to us. We are dealing with several different finance companies and we know there are certain representatives that are what we consider our “go-to guys” because they have demonstrated they care about the relationship and will shepherd the deal through the process. We rely on these relationships quite a bit.
EF Advisor: How important is the ease of doing business from a contractual standpoint – meaning, standardized documents that facilitate funding on an ongoing basis?
CFO: Documentation is relatively standard from our perspective, so the ease of completing documents really never enters our decision making process.
EF Advisor: Do captive finance companies play a role in meeting your equipment financing needs?
CFO: We hear from captive finance companies now and then, but we have not utilized captives despite their attempts to win our business. Our experience is that captive finance companies are just not that competitive from a rate perspective and this is problematic.
EF Advisor: Have new entrants seeking to finance equipment such as community banks been calling on you, and has this activity increased over the past few years? Have any of these new entrants been successful in winning your business?
CFO: Yes. I can’t tell you how many times new lenders come to our doors looking for an opportunity to bid on our business. And if a lender wants to get in the game, we will give them a shot. But they must be competitive and possess an industry expertise as I mentioned earlier. As for community banks, yes we are definitely hearing from more community banks that were not pursuing us in the past. More recently, there have been a few banks calling on us that are not what I would call community banks but rather regional banks. We have found some of these regional banks to be extremely competitive from a rate perspective. Additionally, the few that we have been dealing with have hired representatives who have been with equipment finance units in banks or with commercial finance companies and demonstrate a clear understanding of our business. So the regional banks may not always have a defined equipment finance arm, but some have hired equipment finance specialists that understand our industry. These are the ones that get a shot at our business.
EF Advisor: Did your company pull back on purchasing new equipment during the height of the recession and utilize equipment longer than your typical practice?
CFO: Yes, a little, as most companies did at that time. But some of our contractual relationships require we keep within certain ages of equipment. So, whenever possible, we did hold equipment longer. But, we are a bit handcuffed in this area and are required to upgrade our equipment quite regularly.
EF Advisor: Do you utilize tax lease products at this time or did you at one time?
CFO: No, we use loan products due to the long useful life of the equipment we purchase. We did try leasing in the past. But to be honest with you, we found it to be an unfavorable form of financing for various reasons. So, we stick with straight financing.
EF Advisor: Are you concerned about the effects the proposed changes to the FASB lease accounting rules could have on your company’s financial statement presentation and resulting interpretation by lenders?
CFO: Yes, it is a concern to us from a reporting perspective. We need to be concerned about it and understand it. So we are paying attention to the proposed changes.
EF Advisor: What is your outlook for the economy for the balance of 2013 and into 2014?
CFO: I feel pretty good about the economy. I think we are past the leveling out of the economy and starting to see it perk up a bit. I think the economy is growing at the right pace … slow and steady.