To make money, you need money. A classic Catch-22, right?
Not exactly. Obtaining working capital and credit for a burgeoning rental operation doesn't have to be a painful experience if the borrower has a solid business plan. Clearly, there are several avenues to funding a rental operation and acquiring equipment — personal savings, private sources such as friends and families who might lend cash interest-free or at a low interest rate, banks and credit unions and independent finance/leasing companies.
Banks and credit unions are the most widely used, but an increasing number of rental entrepreneurs are turning to independent equipment finance/leasing companies that use a slightly different approach to evaluating a borrower's profitability. While most banks dissect balance sheets and profitability, these companies are more interested in the rental owner's ability to pay off future debts.
“Most rental operations, from the smaller yards to the multi-location businesses are good candidates for a loan or a lease,” says Vincent Faino, president of American Equipment Leasing, Reading, Pa. “We look for the basics, industry experience, cash flow, collateral and to some extent, assets and liabilities. We also look for character.”
While equipment finance/leasing companies don't seek to replace banking relationships, they claim to offer rental operators a different, cozier type of relationship.
“Rental center owners need to diversify their lender portfolio by forging relationships with other lenders, primarily companies that provide choices and programs that are customized for their needs and creditors who are flexible and who know the industry, like how to read and understand the rental balance sheet,” says Robert Bussells, co-founder of Perfect Capital Solutions, Baltimore, Md.
Bussells adds that his company is not “a one shot and done” type of lender. “We seek to establish relationships with center owners as well as equipment vendors,” he says. “Partnering with them to ensure that their financial decisions are made with the proper amount of input, information and recommendations. In short, we'll be there for you, from the beginning of your lease/finance arrangement to the end.”
Budding owners appreciate the fact that independent equipment leasing/finance companies are familiar with the nuances of the rental industry. Most have developed long-term relationships with rental veterans and specialize in niche financing.
“We were established in 1968 and have served the rental community for three decades,” AEL's Faino says. “We believe that rental is a core industry market and has passed the test of time in terms of exceeding expectations in all economic climates.”
“What's unique with equipment leasing is that we can tailor-make their finance package so it corresponds to the anticipated rental revenue,” adds Tim Cetto, president of newly formed Pinnacle Capital LLC, Wenatchee, Wash. “With a pressure washer, for example, they might only need a two-year term. With a loader-type, a four-year term might be necessary. Also, as specialty equipment financers, when we structure a contract for them, it's a fixed contract with no risk of getting dropped.”
Follow the money
Lenders and rental center owners have always been a perfect match, since rentals by nature is capital-intensive. Rental center owners are constantly looking to expand their inventory, open new facilities, hire more employees or upgrade their computer system. To realize all of these, a smart rental entrepreneur must utilize every funding source.
‘“Most rental operations, from the smaller yards to the multi-location businesses are good candidates for a loan or a lease. We look for the basics, industry experience, cash flow, and collateral and to some extent, assets and liabilities. We also look for character.”
— Vincent Faino
“A successful rental owner will have to use a combination of all four [sources] consistently,” Cetto says. “When comparison shopping, they need to align themselves with a good manufacturer, align themselves with a bank that will provide them with working capital and credit, work with individuals in the industry to help them understand what the hottest units are and establish a relationship with equipment or specialty financing companies.”
When applying for a loan, most lenders will request financial statements, tax returns when applicable and check credit history. To become a better candidate for obtaining a loan package, Cetto suggests being cautious about the information one reveals.
“Credit information is something they should keep close to heart,” he says. “When a rental center owner is trying to acquire money from many different sources, it's important that they have a game plan in place and not give out information to every Tom, Dick and Harry. It impacts our ability to loan them money when there's too many credit inquiries.”
And if a rental center owner has a less-than-perfect credit history, they can take heart. Some lenders offer flexible finance packages.
“There are no ‘etched in stone’ policies regarding credit or equipment,” Bussells says. “We can assist in all types of situations, from the center looking for light, hand tools to the center wishing to add a backhoe. In short, if it makes sense, we'll do it.”
