Recently I had the opportunity to discuss equipment and commercial vehicle financing with Allan Hirsh on AHA business radio. It was nice to see Allan who is an old friend who I used to compete against in Lacrosse over 40 years ago. We discussed the differences between bank financing and lease financing. In general, obtaining bank financing can be a lengthy process requiring a lot of paperwork. Banks are highly regulated and finance approximately 25% of applicants, leaving the other 75% looking for financing options. Alternative sources such as credit cards and factoring are often considered although they can be expensive in comparison to lease financing rates.
Our lease financing process is simple. Our one page application can be accessed and completed online. We typically respond within a day or two. We also offer an electronic document process that makes it easy to review and sign documents from anywhere. For large transactions, banks may be an optimal source; however, for most equipment/vehicle acquisitions it makes sense to preserve bank credit lines. The SBA is another financing source businesses like to turn to. Although it can be an attractive source, the application and decision process can take months. Businesses often turn to us in the interim for financing until they can obtain their loan.
Vehicle leasing vs loans. Vehicle leasing has different structures which can be favorable in comparison to a loan or purchasing a vehicle outright. There are good reasons why 50% of commercial vehicles are leased. A business needing a fleet of cars for their drivers often needs the lowest monthly payment so they can invest capital back into the business. They only want to pay for the use of the vehicle which a lease provides. With a loan a business is paying a larger monthly payment due to the residual value that is included in the payment. A loan often requires significant upfront money down. I’m often asked when to lease vs a purchase. In general I tell clients if they are going to keep it for more than 5 years buy it; if less than 5 years lease it. Because we buy hundreds of vehicles we are often able to find great deals on vehicles that most cannot find.
Our discussion turned to finance agreements. Lease finance agreements for equipment are generally financed to $0 at end of term . An operating lease often has a residual value that needs to be addressed at the end of term. Operating leases are often offered by equipment vendors. It is important to plan your purchases as far in advance as possible, preferably 3-5 years down the road. An analysis of the equipment and vehicles needed to run and grow your business is essential, as well as if financing will be required. Having approved financing upfront can help your negotiations.
We discussed how rates are not always as they appear when you factor in collateral and reporting requirements not to mention fees. Lease financing rates depend on the credit strength of the individual/business applying for credit. Some of the factors we consider are credit history, residual value of the equipment to be financed, and the financials of the business, including tax returns.
We use resources such as Paynet, returned checks and recommendations from banks, and up to a dozen other factors when considering an application. Our transactions range from 600k for equipment and millions on the vehicle side due to financing of fleets for rental car companies. Depending on the size and type of transaction we may require a personal guarantee. Our team has over 60 years of collective financing experience which enables us to respond and make decisions fairly quickly.
To listen to a replay of the interview please click the image below.