For 25 years, Australian financial broker Finlease has been funding plant and equipment of every description for business owners, gaining valuable insight into the complexities of equipment financing.
For Alex Charilaou, Senior Equipment Finance Specialist at Finlease, one thing is clear: the client has already approved the machine purchase in their own mind – they know why they are buying it, what it will earn or save them and the risks involved.
“Whether the machine is being purchased to improve processes required for additional contracts or to reduce existing outsourced subcontractor costs, the business owner has already gone through a mental ‘approval’ process or justification behind buying the gear,” Mr. Charilaou explains.
However, he says this concept and what it really means is often lost on the banks, or at least not heard as clearly as it needs to be.
“What’s the relative ‘skin in the game’ if it all goes wrong?” he asks.
For the bank, Mr. Charilaou says any default can create a potential loss and the approving officer may be hind-sighted on the transaction to see if they had made an error in approving the loan on the information initially presented.
“For the client, it gets very personal. By that, I mean they typically have their personal guarantee on the line and, with that, an obligation to make good any debt shortfall even if that means they need to sell other assets to clear the debt or face the prospect of bankruptcy.”
With that in mind, it’s fairly easy to see who has the most “skin in the game”, he adds.
Good finance is not just about jumping through hoops for the bank, Mr. Charilaou explains. It is about assisting the bank in understanding why the decision has been made to buy the machine, how it will be paid for and the defence trenches in place in the event it all goes pear-shaped. This needs to be communicated well and into “bank speak”.
“If it is not, either a finance approval won’t happen or if it does, it will be roped and chained far more than it needs to be and possibly to an extent that is not ideal for the client,” he adds.
Fast track finance approvals
Mr. Charilaou says he sees a huge amount of finance being done simply based on client profile and behaviour where there is no need to provide financial information.
“Many assets – vehicles and smaller excavators etc – up to $150,000 are being automatically approved where the client is three years in business, a property owner (if not a 20 per cent deposit is required) and has a good credit history,” he says.
This fast track finance also applies to larger acceptable assets up to $500,000, where the client is about to or has recently finalised a similar debt of, say, $400,000 and the new payments are up to 125 per cent of the outgoing debt.
Mr. Charilaou says other finance approvals come down to three basic questions: can you afford the payments? If it all goes pear-shaped can you sell the gear and pay out the debt? Have you always honoured your commitments?
“Whether the asset cost is $20,000, $200,000 or $2 million, these three fundamentals apply,” he says. “It is true that the larger the asset cost, the more detail is needed around these three questions. However, these are all in reality simply subsets of these three fundamental questions.”
Can you afford the payments?
“Do your present trading results indicate you can pay even if the machine being financed does not contribute to any additional income/profit? If no, what tangible savings or additional incomes can be reasonably expected?” Mr. Charilaou asks.
“Are there existing debts that are currently running off, which will free up cash to service the new debt, or are you spending money on subcontractors which will no longer be the case with the new machine?
“Has the repair and maintenance cost on the existing gear become so high that significant savings will be made by replacing it?” he asks.
“Has the level of existing and/or new work increased to a level where the extra machine is needed?”
What’s the fallback position if it all goes pear-shaped?
On the asset exposure side, if a $1 million machine is seen to have a $700,000 auction value, the perceived shortfall exposure is $300,000 on day one, Mr. Charilaou explains. He says lenders can be comfortable with this exposure if they know the client has other equipment which is either wholly owned or has equity in them meaning the resale value is greater than their debt.
“Similarly, great comfort is obtained where the business owner has good equity in property (either personal or through the business),” he says, adding that banks are not after a mortgage. Simply the comfort of knowing the borrower has resources which can assist in paying any shortfall if called upon to do so.
What does your report card look like?
Mr. Charilaou says a key question for business owners to ask themselves is whether they have always honoured their commitments and not left any financiers “bleeding in the alley”. Does your public credit report look fine?” he adds.
He asserts that there is nothing complex about the financial approvals process and they are in many ways simply common sense and definitely not “rocket science”.
“Any savvy company owner has already addressed such matters in their own mind as a function of contemplating the purchase of the equipment. After all, they are the ones who are taking the real risk and will suffer the consequences of an incorrect decision.”