Over the years, pallet manufacturers have debated the best way to acquire business essential equipment. The pallet industry is capital equipment intensive. In order to grow your business, you need to add more equipment and/or hire more workers. Finding and hiring more employees is more challenging than it has ever been.
So, in order to grow your business, you need to find a reliable source of capital. Many pallet businesses have decided to grow their business while avoiding taking on business or personal debt. This strategy works if you are able to generate enough cash flow from existing customers. Self-funded purchasing can limit the size and pace of your growth because it may take years to save enough to afford a new, critical piece of equipment.
When sales slow, rather than taking the time to re-tool for future growth, the business retreats until it acquires new customers. Significant business opportunities are often lost while you sit back and wait for the economy to rebound.
In addition, if you do not take on any business debt, you could miss out on future customer opportunities because your bank or equipment lender is unable to approve a large equipment loan due to limited or no business credit history. It makes sense to borrow on your business even if you have the cash to pay for new equipment. This practice establishes a good credit history that you can use later when you really need it. Remember, the best rates go to those companies that have a proven credit track record. The additional cash flow generated from borrowing can be used to hire more employees to operate the new machinery. It is also important not to borrow for equipment using credit cards or even your business line of credit, which is best used for routine or regular purchases.
The disadvantage of business credit cards is that lenders view them no differently than personal credit cards. The credit reporting agencies report them the same and, in fact, they drive down to your credit score. Resist the temptation to use credit cards to get free stuff like hotels and other travel related expenses.
Traditional equipment leasing companies have always been a viable option to provide funding for machinery purchases. Some companies have resisted this avenue because they have misunderstood the benefits. The financial sector has simplified its processes and worked to make them easier to understand.
This article covers six things you may not know about how equipment financing has evolved.
#1 – Equipment finance/lease companies do not report payments to your personal credit report.
This allows you to build business credit without impacting your personal credit, even when a personal guarantee is required.
#2 – Equipment finance/lease allows you to finance significant non-equipment soft costs.
It is not uncommon for banks to require down payments of 20% and finance only the equipment itself. Equipment lenders will finance 100% of the cost of the equipment and related soft costs, such as infrastructure, wiring, plumbing, concrete construction, etc. The biggest requirement here is that the machinery must be at least 50% of the total invoice.
#3 – Equipment lenders can loan for larger down payments while deferring loan payments until after equipment delivery.
This benefit is especially helpful given the current excessive lead times for taking possession of new equipment. Lead times of 12 months with credit approvals of 90 days would seem to make financing impossible. Instead, there are a couple of things that can be offered by the lender to help the pallet company. Down payments can be made by the equipment lender to the equipment vendor on the customer’s behalf. This frees up cash to be invested in preparing for the equipment. Extra cash flow could be used to train new or existing workers to run the new equipment. Or it could be used for new construction to prepare a place for the new equipment.
The pallet company can start to make payments on the new equipment loan provided the manufacturer can provide a serial number.
Another option where no serial number would be needed is a progress payment loan. This would run independently of the equipment loan. Progress payment loans work well where the end user is not comfortable paying the vendor in full for an order that will not happen for 6-12 months.
#4 – Equipment lenders will finance used equipment for 60 months from private parties or auction houses.
Due to long lead times on new equipment, pallet businesses are seeking out used equipment from vendors, private end-users or an equipment auction. Equipment lenders can offer financing, including an auction line of credit letter they can use to purchase equipment.
#5 – Equipment lease companies often don’t require a personal guarantee.
There is an assumption that equipment lenders almost always require a personal guarantee. For a small business owner, that is no longer true for companies with 5+ years in business and an established business borrowing history.
The lesson is that when you start your pallet business, start borrowing from a bank or equipment leasing company before you need the money. This will make it easier to get approved, offer you better terms and eliminate the need to personally guarantee after a few years of good pay history.
#6 – Equipment finance agreements have largely replaced equipment leasing on most small-ticket loans of less than $250,000.
By making the end user the owner, it simplifies things a great deal. Vendors no longer have to get credit department approval for the finance company. Sales tax rates and sales tax exemptions for manufacturing no longer need to be researched and approved by the tax department of the lender.
So, with all these financing benefits in mind, let’s discuss some easy steps that small business owners can take to acquire equipment while lowering their personal financial risk.
Step # 1 – Examine Your Personal Credit Reports
The first step a business owner can take is to look closely at his or her personal credit. There are three credit reporting agencies. Each agency provides a score based on balances, activity and payment history, among other things. Most lenders will look beyond the score and consider credit availability on revolving and installment debt. It is actually a good idea to have some credit card lines, even if you are not using them with much frequency. In fact, that is the ideal scenario since it gives you a cushion to fall back on when business sales slow or unexpected expenses occur.
The following is contact information for each reporting agency.
• Equifax – 800-685-1111(general) or 800-525-6285 (fraud) www.equifax.com
• Experian – 888-397-3742 (general/fraud) www.experian .com
• TransUnion – 833-395-6938 (general) www.transunion.com/
Step # 2 – Investigate Your Business Credit History
There are two main business credit reporting agencies that equipment lenders and banks use.
Dun & Bradstreet provides a Pay-dex score that is a unique dollar-weighted numerical indicator of how a company pays its bills over the past year. It is based on trade experiences reported to D&B by various vendors and lenders. Pay-dex scores range from 1 to 100, with higher scores being better. It reports both revolving net 30 and installment loans (65 and above are considered acceptable).
Paynet is a newer reporting agency that was recently acquired by Equifax. It has quickly become the preferred source for many equipment lenders because it only reports the installment payment history for a business from a trusted bank or equipment lender/leasing company. It has enabled lenders to take safer risks because they can better predict how well or poorly a business will pay a new loan based on prior payment performance with other lenders.
Lending institutions anonymously report their customers’ history to Paynet. It also reports whether or not their contracts are personally guaranteed by the owner of the business.
Sometimes a strong business track record can overcome blips on personal credit, so it can be helpful to work with equipment finance lenders that report to D&B or Paynet. It is very important to make sure that your equipment loans are kept current. I would recommend bank ACH as a simple strategy.
Many equipment vendors have a relationship with an equipment finance company. Often these relationships will lead to the best terms available because of the lender’s understanding of the end user’s business needs. The equipment lender can also customize solutions like payment deferrals allowing them time to put equipment into use before making full payments.
Editor’s Note: For more information, please contact Ian Liddell at Accord Financial Group, Inc. at 513-293-4480 or iliddell@4sfg.com.
