20 Tips to the Line

Over the past 10 years, banks and financial institutions have turned towards automated credit scoring. According to Mike Arness of Clearview Financial, Ephrata, Wash., most loans of less than $100,000 are based on score cards.

“This has had both a positive and negative effect on a rental company's ability to borrow,” says Tim Cetto of Pinnacle Capital LLC, Wenatchee, Wash. “On the positive side, it allows lenders to expedite credit decisions in minutes, without having a credit person review the transaction. On the negative side, when you do not have a credit person review your deal, any story with regard to credit issues will not be taken into consideration by the system.

“The majority of the credit score is based on, in most cases, the personal credit of the owner of the business. Items that severely affect the credit score of the individual for the worse is high revolving debt, for example, credit cards close to or at their limits, as well as multiple inquiries on the credit bureau.”

“Lenders are sensitive to this,” says Arness. “If you have more than six inquiries in six months, some lenders will not do business with you. Anytime somebody looks at your credit, they create an inquiry.”

Arness says when you are looking for financing, avoid sending applications to multiple companies, but try to stick with a company you have worked with.

Don't respond to “pre-approved” promises of credit from credit card companies. “You are not really pre-approved, this is just advertising,” says Arness. “They will run your credit if you respond.”

“Protect your personal credit by not allowing anyone to pull your credit without your signed permission and only apply if you intend on using the credit once it has been approved,” says Cetto.

Bill Lassiter of Lynnray Financial Corp., Norcross, Ga., suggests always using credit cards issued in the name of the business rather than personal credit cards.

Make your payments on time. Slow pay hurts your score, says Arness.

Both Arness and Cetto say that once credit card debt tops $35,000, credit analysts get nervous.

“Never let any one card go over 50 percent of the available credit limit,” says Cetto.

“Do not max out your cards,” adds Arness. “The percentage of available credit is very important. Lenders like to see about 50 percent availability. This means if you have a credit card with a $10,000 limit, try not to go over $5,000, leaving you with 50 percent of the credit still available. If you need more, you are better off to open another card and use it. Arness recommends not canceling credit cards with zero balances, because the unused credit improves your score.

Leasing equipment helps conserve a rental company's equity by not having to show the debt as a liability, says Cetto. “For accounting purposes, the only liability that would be shown on the balance sheet would be the current liability which is equal to 12 monthly payments,” Cetto says. “Be sure and check with your accountant to see if the lease agreement will qualify for true tax-lease accounting.”

Thomas Milligan of CNH Capital, Racine, Wis., adds that leasing facilitates fleet management because payments can be tied to the cost of use rather than ownership.

Manufacturer discounts and low APR financing “allow purchases at very attractive prices and payments,” adds Milligan. “This strategy also allows the use of the ‘economic stimulus package’ to maximize the first-year depreciation. This can be an attractive option for rental companies that want to own the equipment.”

Paul Powers III of Salinas, Calif.-based Powers Associates suggests rental companies work with their CPAs to develop pro-forma financial statements and budgets. “Having these tools is like navigating the seas of competition with a map and a plan,” Powers says. “You may not remain on course, but such tools, implemented correctly, will let you know immediately when you are off course. Without them it could be months or until the end of the fiscal year until you see the results of the decisions, or lack of decisions, made throughout the year.”

Powers recommends that rental companies always allocate enough dollars for fleet replacement, or if fleet replacements are curtailed for the quarter, for increased maintenance expenditures.

As Powers says, “We are more than a customer service based industry renting equipment, but equally important, we are managers of assets. Determining the sequence and timing of purchasing, disposing and maintaining the assets is of great importance, including matching the proper depreciation schedule to the asset.”

Depreciation schedules that are too long or too short can impact the bottom line. “Too short of a depreciation schedule or life will lead to increased depreciation expense in the short run, and possibly a large capital gain at the time of the sale of the asset,” Powers says. “Too long of a depreciation schedule or life will help to increase net income in the short run due to lower depreciation. However, such a decision could lead to holding on to the asset longer than you should and possibly lead to a book loss at the time of the sale of the asset.”

Overtime expenses can be overlooked and can become a habit-forming routine, says Powers. While often essential in peak times, overtime expenses should be reduced or eliminated when there is no need.

“One hour of overtime per day could cost a small company with 10 employees more than $40,000 per year,” he says.

A lack of training impacts customer service and employee morale and directly affects the bottom line, says Powers. With improper training, employees might offer poor instruction to the customer, leading to equipment misuse, affecting equipment life and maintenance costs. A lack of training for equipment maintenance personnel can again lead to increased costs and reduced equipment life.

“Much of this training is provided by factory personnel at no cost to the employer other than wages for the employee,” Powers says. “Your employee will get training directly from the factory, and they will not only gain valuable experience during the seminar, but I have always noticed a remarkable increase in morale and the performance of their work following the seminar.” Most manufacturers will conduct training at the rental company.

Given the cost of workers' compensation policies, proper lifting techniques, usage of safety equipment and overall safe workplace practices can have a dramatic impact on a rental company's bottom line.

Companies typically hire right after somebody quits. There's an immediate need for a driver, counter person, dispatcher or mechanic, and companies are often more concerned about filling the hole quickly rather than taking the time to do it effectively. Powers offers these tips for hiring the right person:

• Spend the necessary time to screen applicants.

• Spend the money for complete pre-employment physicals and drug screens.

• Spend the money for a complete background check.

• Check with a labor law attorney to ensure your hiring practices are up to the current code.

Always refuel the equipment upon return and charge the customer double your fuel costs, suggests Dan Kaplan of Daniel Kaplan Associates, Morristown, N.J.

If you think delivery is free, add up the costs of insurance, delivery vehicles, driver salary and training. “Charge a minimum of $2 per loaded mile,” says Kaplan. “Don't accept ‘they won't pay’; charge something. This is a discipline issue.”

Automobile companies do this for a very good reason — it makes money. Kaplan suggests a charge of 12 to 14 percent of rental revenue.

Shaun Flanagan of Horizon Advisory Services, Newport Beach, Calif., points out there are basically five profit centers to a rental business: New sales, used sales, parts, service and rentals. “If you sell to someone and they can buy parts and obtain service from you, then you can get their rentals,” says Flanagan. “If you still believe that if you sell a machine you cut off your rentals, you are missing the point. I have found this to be a big endless chain. Take care of one link and the others fall into line. Sales can be the additional profit that you need to supplement declining rental revenue, and when rental rates return you have a great business.”