Financing for used construction equipment soars amid pandemic
Ddespite pandemic, some financial institutions are reporting an increase in used equipment lending activities.
Rich Fikis, chairman of Komatsu Financial, said that in April, at the start of the company’s new fiscal year, used equipment loans got off to a slow start, but May saw a big rebound.
“It looks like some people were probably sitting on the sidelines trying to figure out what could happen, but our month of May was actually our strongest May in the last three years when it comes to fundraising. used equipment, ”said Fikis.
Komatsu focused on ending its equipment leasing and launched an aggressive campaign offering 36 months at zero percent interest – the first time in company history for zero percent interest on used equipment. It also offers 90 days without repayment on loans and provides one year guarantees on its used equipment. As the pandemic took hold, these incentives became even more useful for entrepreneurs concerned with preserving their cash flow.
“Cash flow is definitely a concern right now,” says Fikis. “A lot of the clients we speak with still have a large backlog from before the virus, but are just a little more cautious about cash flow.”
Komatsu offers free maintenance on its new equipment through its Komatsu Care program. Fikis says that regular maintenance performed as part of the Komatsu Care program allows the company to provide a one-year warranty on its certified pre-owned equipment that comes out of rental.
“This generated a good buzz with our used equipment managers,” he says of the company’s incentives. “At times like this, a little extra to get someone over the hump is helpful. If the customer is considering leasing or being new or used, any additional leverage will help them make that buying decision.
John Deere has also seen an increase in loan activity and has offered aggressive incentives for used equipment.
“We have seen a modest increase in the used equipment market this year over the past two years,” said Jayma Sandquist, chief marketing officer and senior vice president US / Canada at Deere.
“Initially, as the states closed, we saw projects suspended or delayed because our dealer network and our customers implemented security protocols,” she adds. “Now, as states begin to ease restrictions, renewed interest is occurring.”
At the start of the pandemic, Deere offered 90 days without payment and zero percent interest on its certified used construction equipment.
“We believe contractors are looking for options to protect and maintain cash flow in response to pressures in the construction space, as well as in the energy segment,” she says. “As states begin to open up, our dealer network is focusing on the availability of equipment with different financing and / or lease options to help customers. “
Entrepreneurs with credit problems
The various incentives offered by large equipment manufacturers and lenders are often tied to a contractor’s credit rating. And those with poor credit or new businesses that haven’t established a credit history might have to seek other lending options, if traditional banks and finance companies turn them down.
This is where YES Leasing found its place. The company offers lease options with an option to buy to its customers and does not consider credit history. (YES means your equipment specialists.)
“A lot of companies look at companies’ credit history,” says Cory Cataldo, director of development for the Miami-based company. “We are looking at your business. We want to know you, to know what you are doing.
Cataldo says the company’s business has remained strong during the pandemic, especially as some traditional financial institutions have tightened lending standards.
Corporate leases are actually more similar to loans than traditional leases, but with a few differences. Instead of a down payment, customers provide a down payment. But the deposit is used to purchase the equipment. At the end of the lease, the customer owns the machine, instead of traditional leases in which the equipment returns to the finance company. Leases do not have an interest rate like loans. But they come with a hefty price tag.
As an example, explains Cataldo, buying a piece of equipment for $ 100,000 over three or four years with a deposit of $ 20,000 would cost the customer about $ 180,000 over the term of the lease. “And that’s a lot, 180 out of 100,” he says. “But at the end of the day, with the equipment that we fund, you’re usually going to make between $ 800,000 and over a million dollars to have it.”
“We take a lot of risks. We charge a lot of money, but we are not sharks, ”he adds. “We do things that make sense to our customers. And we like to say, “We’re the best of the bad options. “
He says leasing with the company will cost less than leasing a piece of equipment for the same length of time. “On a price of $ 100,000, we’re typically $ 150,000 cheaper than leasing over a three-year period.”
The company limits its exposure to $ 150,000 per used machine and up to $ 200,000 for a used directional drill due to higher prices for good used drills. Deposit requirements vary from 15 to 20 percent of the purchase price. The deadlines are generally 36 to 48 months.
Most of his clients are either small businesses that generate $ 20,000 in revenue per month and have a few employees, or businesses that make $ 200,000 per month with 30 to 40 employees, Cataldo explains.
“We work with guys who generally would have struggled to finance themselves. This is usually a contested credit, ”he says. “We look a lot at cash flow and what it brings in, and we look a lot not only at their equipment needs, but also our knowledge that they are going to earn more with this equipment than they pay us for it, so that it is worth it for them to keep paying.
Rather than looking at credit scores, the business looks at an entrepreneur’s cash flow. “Usually if what they gross gross is about 50% of the cost of the machine they want to buy, we approve that person 90% of the time,” Cataldo explains. “Now if they meet that metric about half the time they end up being approved for a 15% deposit. ”
The business requires an application and for the applicant to show the last three months of the business bank statements. The company also takes a questionnaire with its candidates to get a better idea of the company, its plans and why it needs the equipment. If the request is successful, the company wants to verify contracts and bank statements. He does not perform a credit check, which could adversely affect a customer’s credit rating.
YES will fund the auction purchases and may give approval before the auction occurs, Cataldo said. It will fund contractor-to-contractor sales, but instead will try to direct buyers to approved equipment dealers. Sales to individuals can run into title issues on the equipment, in which the seller may not even be authorized to sell it. This can also be a problem if the equipment turns out to be a lemon.
“The advantage of buying from an authorized dealer is that if you get a piece of junk, they have to care,” he says. “… And they have staff who could at least work on it and fix it for you.” “
Ditch Witch of Florida Caribbean refers its clients to YES Leasing when they are not eligible for further financing.
“YES is a great option for people with a good business, they just have challenges elsewhere,” says Gary Landry, Territory Sales Manager for the Plant City-based dealership. “It’s a more expensive product, but it can put equipment in their hands.”
“Is this a great option? No, ”he adds,“ but it’s an option that if you can get a piece of equipment that you can make a lot of money with on a monthly basis then it’s worth it. “
Hitting financial trouble
Financial institutions are reporting an increase in the number of entrepreneurs seeking new terms for financing their equipment and, in some cases, defaulting on loans during the pandemic.
“We have seen a historic number of requests for payment relief and have been able to accommodate the vast majority to help our customers through these difficult times,” says Deere’s Sandquist. “We have also proactively called many of our construction clients to assess their confidence in their financial situation, and we have worked with them to revise schedules as necessary and appropriate. “
Komatsu’s Fikis said the company has also seen an increase in restructuring requests. “It’s certainly not unprecedented or unexpected,” he says. “We have learned a lot from 2008-2009. We helped a lot of our customers then, but we also realized very quickly that this leads to great customer loyalty after we were ready to help at that time. So we were proactive in March in reaching out to customers to offer assistance as needed during uncertain times. “
Communication is key – and sooner rather than later – for entrepreneurs who anticipate difficulties with payments.
“Communication is 100% the most important thing in this situation,” says Fikis. “We always know there will be peaks and valleys where customers struggle. But if they tell us about these struggles, the vast majority of the time we can find a way to help them and help them get through this difficult situation.
“I can’t repeat enough that proactive communication is by far the most important aspect of this. “