In its July issue, RER examines how manufacturers and rental companies are dealing with burgeoning costs of fuel and materials, and how this, along with an economic slowdown, affects relationships between manufacturers and rental companies. RER conducted a number of interesting interviews with manufacturers, rental company owners and lenders examining these issues from various perspectives and will run a series of these interviews in RER Reports. The first interview is with Harry Schneider, president of Allied Financial Solutions, Florence, Ky.
RER: We’ve seen manufacturers hit with major costs increases — steel, tires, components, copper, probably every other item used in manufacturing. What kind of impact have you seen on manufacturers?
Schneider: As a lender to the rental industry, I have seen many manufacturers trying their best to absorb some of the additional costs. Some have simply had to increase costs to stay in business. There are so many economic factors that demand attention at this time. Every cost related to manufacturing, distributing and delivering products has increased in some manner over the past 12 months.
Has the current credit situation made it more difficult for manufacturers to obtain financing for sales to rental companies?
Most of the funding sources which support our efforts in lending to the rental industry have not tightened their credit requirements. However, we have had to maintain a reasonable rate. On the other hand we are in an economic environment where banks are beginning to back away from the rental industry again. This is very predictable as they did so in the late 1980s and early 1990s. These banks link “rental” to the construction industry. They read all of the news about the struggles of the construction industry and simply choose not to lend to that industry or rental. But those lenders who understand the rental industry continue to lend as usual.
From what you’ve seen, has this brought about a contentious relationship between manufacturers and rental companies in the current environment?
The major issue will of course be the relationship between the increases in the cost of the products versus the ability to raise the rental rate to the end user. There are three tiers to any rental — the manufacturer, the rental house and the end user. All of these entities are faced with the same economic situation. If the manufacturer raises the cost of the equipment in order to make a reasonable profit then the rental house must raise its rental rates to achieve the same reasonable profit. The end user then must find a way to increase his billings or pricing to offset the rental rate increase in order for that end user to make a reasonable profit. It is really the end user however who drives the deal. That is because the end user drives the demand. Both the manufacturer and the rental house owner are well aware of this fact.
Rental companies in general are not buying much right now, they’ve cut their capex. In the past when manufacturers’ sales to rental companies have gone down, they have tried to sweeten the terms, offering better deals to rental companies and better financing opportunities. I would imagine right now those kind of financing deals are not easily available given the credit situation.
You are correct. Manufacturers have come to their financial arms in the past few months and asked them to carry longer delayed payments. The normal delay is 90 to 180 days. Now the manufacturers believe they must offer 180 to 360 delays in first payments in order to obtain the order. Lenders however usually cannot provide such financing. It is extremely difficult for a lender to know that the equipment will be rented during that delayed period and be subject to unusual wear and tear. While at the same time the loan is not amortizing to offset the wear and tear and depreciation of the equipment.
I should qualify the “unusual wear and tear” comment. Rental is considered by most lenders as unusual wear and tear. If a lender loans money to a construction company for equipment, that equipment is not in actual use every day. Sometimes the unit sits for weeks before it is used again. This is not the same as a rental unit. Usually the rental unit is in use many times the normal hours that would be put on if the end user purchased instead of rented. Some end users push the limit on the allowed operating time per day in order to “get the most out of the daily rental cost”. In other words, if they are paying $450 for an 8-hour rental, they are going to try to use it the full eight hours. Lenders would be extremely under-collateralized if they allowed long-term delays before the loan actually began to amortize.
As a financial institution, how do you expect your relationships with rental companies to change over the next year in the middle of a market slowdown?
I can tell you that rental companies are placing strong demands on the lenders to provide lower rates. They hear that the Fed’s cut rates and believe that our rates are cut as well. Most of the regular lending institutions that provide and have provided financing for the rental industries are not bank owned. The Fed’s movement does not affect those lenders at all. The lending institutions that finance consistently and have stayed around for the rental members through good times and bad, have been those who provide a fair product at a fair price and have been able to make a reasonable profit so that they can survive and continue to support the industry. These lenders have built relationships with rental members and have gained their trust and confidence. Rates should not be the only issue to consider. Some institutions really do have “value added” and are worth considering at reasonable rates. Not any rate! But a reasonable rate that allows the financial institution to continue as a going concern.
How has your business been affected by the current slowdown and credit tightening?
Credit tightening is not really a major issue for those of us who have lent to the rental industry for a long time. Any slowdown in our financing volume is directly related to the decision by many rental members to cut back on purchases at this time. We cannot finance what is not purchased!
Any further thoughts on the current economy?
The U.S. economy has not seen a recession in a very long time. Our economy has been at full throttle for many consecutive years. But, many of us remember the last recession. We remember the decisions we made during that recession. Some of them were good decisions, some not so good. But we remember all of them and have learned from them. What we have learned is to be cautious. Cautious does not mean not taking risk. It simply means taking well-calculated risks. Well-calculated risk decisions take more time. When we take more time things slow down! What we have learned is to accept an economic slowdown in order to avoid a long-term recession. We are better educated and better prepared. We are not survivors but those who endure. There is a major difference!
