Operators are increasingly likely to turn to captive lenders (subsidiaries set up to provide lending for a manufacturer’s customer base) for their financing needs. Over the last five years, more than two thirds of mobile equipment financed for aggregate operations has been financed through this market segment.

“One of the advantages of captive is that they’re in the market during good times and bad,” Rankin says. “Captives have stayed committed. We’re real proud of the fact that we’ve done a lot of extensions and modifications and restructures to keep Volvo customers in business during this downturn.”

What’s the right finance option?

To select the right financing, operators must assess their own needs, business strategy, and goals. “It’s real important to understand what you’re trying to do as a company, and then match that to your funding structures,” Rankin explains.

For example, an operator with cash on hand and no desire to incur long-term debt might opt for a cash deal or make a large down payment with a short-term finance period. It could then take advantage of the tax benefits available through equipment purchase.

Another operator might be concerned about cash flow. If lower monthly payments are its top priority, it could select a lease option. In this case, the lender retains the tax benefits. Two traditional lease options include a fair market value (FMV) lease and a fixed purchase option (FPO) lease. With the FMV, the lessee can purchase the equipment for the current fair market value at the end of his lease. With a FPO, a purchase price is determined at the outset of the lease.

“All of the banks and captive financing options are a little bit different, but, generally, what you find is that the FMV will give you a little higher residual because the risk cuts both ways,” Rankin says. “On an FPO, the customer is only going to buy when it’s to their advantage.”

Another important consideration is the length of the financing period. Operators should consider the number of hours of use or tons produced before the equipment’s maintenance curve jumps and finance it correspondingly. “The typical length of the finance term is 36 to 60 months,” O’Brien says. “But we see some 72-month loans, too.”

For longer loan periods, it’s important to make sure that the lessee has a long-term perspective on the business. “The important thing is to match the finance to the business needs so you don’t have a 60-month finance contract and a 12-month or 24-month perspective on your work,” Rankin says. “You need to match those up.”

He recommends including an early out or early purchase clause with longer finance terms to increase flexibility and suggests that operators review financing agreements for pre-payment penalties.

“A lot of people tend to think that my dad, or my predecessor, or I have always funded it this way,” Rankin says. “As we come out of this downturn, I think it’s good to look at the big picture and everything that’s available instead of just how it has been done in the past.”

If operators can determine their business strategies and tailor their financing options accordingly, they will be penny wise. AM