Buying the Behemoth
Knowing Your Business Needs Makes Large Excavator Financing a Snap
By Sharon Harper
When your project demands an excavator to dig deep, you don’t want to leave your business in a financial hole during the purchase. It pays to shop around for financing. With the price of large excavators near $1.2 million, and the medium range models at $150,000 and more, financing is critical; most people don’t have a million bucks in the bank.
So how do you get the capital and dodge the pitfalls to make a sound financial decision? Caterpillar Financial Services Customer Business Center sales manager Colin Grant has two decades of experience to guide contractors through the process. The financing, he says, is the easy part of the process; it’s determining everything you need for the job that’s more complicated.
Typically the process is a fact-finding mission.
“A good salesperson will try to find what the customer is looking for, what applications the machine performs, what tools, attachments and weather conditions they will deal with and the kind of service he or she is looking for,” Colin says. “It will often include a demo of the equipment. Then you’ll talk about price. That’s where good salespeople bring in financing because it can help make that sale and the overall deal attractive.
“Generally, contractors are looking at a package. A lot of times the dealership may have dedicated credit or finance managers that can help develop the most appropriate financial package.”
A multiple unit purchase will certainly be more complex and may require additional financial expertise to sort out what’s needed. Dealerships can almost always handle one-off sales, but often depend on finance specialists to prepare a package deal. Depending on the amount of equipment purchased, financing for $250,000 or less can be completed same-day in most situations; for larger transactions, most finance companies want to see financial statements.
“That takes time to gather the information,” Colin explains. “From a customer’s point of view, it might seem like a lengthy process, which includes submitting the paperwork two weeks before the decision. It could take a lot less time if there is a relationship with the dealer. The industry average is as much as three days to two weeks for larger transactions.”
Contractors should come prepared to pay a minimum of 10 percent down — if their credit is good. Construction customers with strong financials may qualify for no down payment; smaller to mid-size utility contractors with so-so credit may need to shell out as much as 25 percent down.
Here’s where the homework pays off. If you know your business needs, you can determine which financial options best meet those requirements. You can get a loan, an operating lease or even rent to good advantage. A financial expert who has a thorough understanding of your contracting business can explain the benefits of each option — that’s the main reason it pays to shop around for financing.
Colin says the process largely depends on what the contractor’s ultimate goals are for the purchase. Some may be looking for depreciation on the machine to reduce taxable income or want to create equity in their equipment. “They’re not so concerned with payment. Their cash flow is strong so they’re looking for depreciation and the best interest rate.”
Others want to expense their payments entirely and look for off-balance sheet financing, or an operating lease. “They want the lowest operating cost and do not want the risk of ownership of the equipment. Those tend to be the most sophisticated contractors with CFOs and employees who do a good job of balancing their financial position. Often operating leases qualify as off-balance sheet financing, which may have some advantages for the customer,” Colin explains.
Leasing is a good alternative if you want a payment to match or manage your cash flow. A lease also reduces repair and maintenance costs. Contractors who opt for leases generally want the best life of the machine, and the choice to renew or get a new lease upon termination is a sound alternative.
Sometimes the benefits of certain financial considerations are unknown to contractors, but a financial expert can walk them through the maze and dig into their business to understand it completely. “We give them pros and cons of each,” Colin said. “On top of that, we always advise them to consult with their accountant or bookkeeper to get their opinion as well.”
The typical financing period lasts 48 to 60 months. The leasing period can be shorter depending on the amount of hours the contractor puts on the machine. If significant hours are expected, contractors may want to shorten that term and recycle equipment to best suit their operating needs. Some will take longer terms and keep machines for many years and factor rebuild and repair costs into their total cost comparisons.
 How do you know if the rate quoted is a good deal? “The best way is to check around. The Internet will provide a good overview of what range you might expect. In today’s markets, a rate ranges anywhere from 6.5 to 12 percent depending upon the credit quality of the customer. Credit quality is determined by a number of factors, including pay history, revenue growth, profitability, net worth and operating ratios of how well they are doing. Their ability to repay that loan will get them a lower rate.”
Colin adds that 90 percent of the rate offerings are fixed rate. Volatile markets do not make variable rates attractive. “We hope we’ve seen the bottom of the sub-prime, but we don’t really know. In 2008, most economists are predicting six more months at least. Banks are still reporting record losses. We’ll know more by first quarter 2008 as year-end financials are reported. A lot of these companies will have to look deep into their portfolio to see what other losses they’re going to predict. Once we see that, we’ll have a better feel. But it will be a challenging year for our industry because the housing market drives so much.”
From a utility contractor perspective, 2008 is a good year to buy because rates will remain at fairly low levels. With the sub-prime mortgage problems still looming, banks and finance companies are risk adverse to that business, but still looking to replace lost volume, thereby making the construction industry an attractive alternative. Colin states: “We’re definitely seeing a lot more competition. With more competition, better deals are out there. From a contractor’s perspective, while it will be challenging to get business; it should be a better year than most to get financing.”
Colin cautions against contractors going with just any financial company in the market. “Their financing company should be considered a valued partner and one that understands their business and provides the most flexible financing solutions. Contractors should be wary of what’s called fair weather lenders. These are financing companies or banks looking to pick up short-term, additional business but have no real dedication to the industry. Often, at the first sign of a slowdown, they panic and contractors can experience significant difficulty with them if they run into trouble and need assistance.”
Machine prices have risen 2 to 6 percent a year in the last four years as the cost of steel and manufacturing has increased. As prices fluctuate, a lease is a good way to avoid the risk of ownership. In addition, there are tax benefits for a finance company when a customer leases a machine; sometimes they pass the benefits of a quarter to half percent on to the lessee.
Contractors will certainly want to check out the advantages of using a captive finance company vs. a bank.
Colin explains that concentrating on rates takes the focus off the fine print of contracts. “Some of the things to be wary of are fees. Often a bank or finance company lures the contractor in with a low rate, but the contract can require a significant commitment fee, renewal fee, termination fee or the contract is inflexible.”
If the contractor’s work changes and they need to change or swap machines for a newer one, it can be very difficult to change that loan or lease with some companies. They need to ask those questions and have someone review the document beforehand. A contract of more than four pages is a red flag — that’s a lot of language protecting the finance company, but not the contractor.
 Captive finance companies are there for customers in good and bad times. They’re much more able to modify contracts and help them. That builds customer loyalty when they’re in a challenging situation.
Equipment leasing captives like Caterpillar Financial, John Deere Credit, Komatsu and Volvo, to name a few, are reputable companies that adjust contracts and accommodate clients when times are lean. Independents, or non-captives, have stricter rules and inflexibility when it comes to getting in and out of leases and loans.
The attractive rate looks good, but that’s the hook to lure customers in. This is a very specialized business; these other company reps are generalists or masters of none. But captive finance reps know equipment, know the industry and bring much more to the table.
Sharon Harper covers business and department news in her role as a Senior Employee Communications Specialist for Caterpillar Financial Services in Nashville, Tenn. |
