When financing equipment, knowing your business has never been more important

In a previous career, Jeff Horler worked in the funeral management business. Little did he know at the time how applicable the skills required in that line of work – empathy, listening, and understanding – would prove to be in the truck and equipment financing business, where uncomfortable discussions about dying dreams are sometimes necessary.

Owner-operators and small fleets are facing an existential crisis. Freight volumes have softened and spot market rates have plunged at the same time interest rates have steadily increased and the cost of both new and used equipment — not to mention repairs — have soared.

Yet Horler, president of Richmond Hill, Ont.-based Global Leasing & Finance Group and EZ Repair Loan, remains optimistic about the business prospects for owner-operators who understand their costs and cash flow requirements. The first step, he told Today’s Trucking, is to get to know your own business like never before, and to work with a lender that can also understand the nature of the trucking business.

“It’s important to have a lender who understands trucking, and its cycles, and the issues you’re going to face,” he said. “Don’t be afraid to communicate that and be honest. Most lenders are willing to work with you if you give them an opportunity.”

When Horler gets worried is when dealing with truck buyers who don’t have a sound understanding of their own business and cash flow requirements.

“A lot of times, we talk to people who don’t know their business as well as they should,” he said. “And a lot of lenders don’t take the time to get to know them as a customer and what their needs are.”

It used to be so simple. Buy a truck, run hard, make money, flip it before the warranty expires, and get into a shiny new ride. But all the tumult brought on by the pandemic and related supply chain shortages, high costs of equipment and repairs (when you can even get the needed replacement parts), and slowing economic conditions has thrown that time-tested model out of whack.

Older equipment

Scott Taylor, president of Transport Financial Services (TFS) Group, a tax firm focusing on small fleets and owner-operators, just wrapped up 2022 tax filing season. And he noticed some trends among his owner-operator clients.

“A lot of owner-operators are driving a lot of old equipment,” he said. “Between new technologies and high costs, it has scared many to keep running their old stuff. That’s great when you can get parts, stay on top of maintenance and such, but sooner or later that’s going to run out.”

He also noticed many owner-operators couldn’t resist the allure of unprecedented prices and demand in the used equipment market, and sold their truck to retire, sit on the sidelines for awhile, or become company drivers.

“Like the housing market, when you’re in the game, you can play. When you step out of it, it’s hard to get back in.”

Scott Taylor, TFS Group

“Owner-operators have sold, closed down, or become drivers because they were offered ridiculous money for their equipment,” he said.

But as used truck prices remain stubbornly high, some of those OOs have now been priced out of the market, not unlike homebuyers in a heated market just waiting for a crash that hasn’t materialized.

“Like the housing market, when you’re in the game, you can play. When you step out of it, it’s hard to get back in,” Taylor said.

Engine overhauls

Many owner-operators are opting to finance engine overhauls to extend the lifecycle of their current truck. Horler said it’s a good option when used equipment valuations are high, because the value of the underlying asset gives them the opportunity to finance those expensive rebuilds.

On the flip side, those engine overhauls are also becoming more expensive, and if used truck prices come down to Earth, then owners will have less equity in their trucks to borrow against to fund a costly overhaul. This is why Horler urges customers to set up financing for an engine rebuild before it’s needed.

“We see people coming to us looking for an engine replacement on a truck that’s been under lease for less than a year,” he said. “We can’t help them with that because the leasing company should’ve looked at what they were financing at the time. If you’re going to need a new engine in a year, pre-approve for an engine rebuild [when purchasing the truck] so you have the peace of mind of knowing you have that.”

Paul Donofrio, CEO of Canadian Truck Warranty, has seen customers extending their equipment life-cycles and purchasing third-party warrantees to mitigate the risk of running older equipment.

“A customer should always purchase a third-party warranty when OEM coverage is over, or when buying a pre-owned truck,” he insisted. “A third-party warranty will also protect the funds of a finance company and adds value to a truck on resale.”

Canadian Truck Warranty customers, he added, are requesting longer terms in mileage and time coverage so they can comfortably run their trucks longer.

Buying a brand new truck, especially for a fledgling owner-operator, is not always viable and Horler said they must be honest with themselves about that.

“Not many people out of the gate can get a quarter-million-dollar truck, or a $300,000 truck,” he reasoned. “They need to educate themselves on what is realistic, what are their needs – not their wants – and what is their cash flow. What are the financial implications of a lease or loan? They’re treated differently on business statements. What will be the best solution for your cash flow? What are your overhead and operating costs and how are you going to manage that?”

Shop rates

Not all lenders are the same and shopping around will reveal some disparities in borrowing rates. The big banks will raise interest rates in step with the central bank, but not all lenders are beholden to Bank of Canada interest rate hikes.

“We are self-funded,” said Horler. “Our interest rates are locked in for a while. We’re not dependent on bank financing as our sole means of funding, so we have a little cost certainty.”

Customers must also understand the various financing options that exist, and which better suits their business. An open term loan, for example, can be paid off early in full or in part without penalty, while leases generally come with early payout penalties. With rising interest rates, an open term loan gives owner-operators the chance to increase payment amounts or frequency and pay the asset off sooner to protect against future rate hikes.

Owner-operators must also understand the connection between their personal and business credit ratings. A few missed payments on a personal credit card may make it difficult to get financing on a piece of equipment, especially as lenders further scrutinize the risks.

“If you are a small business or owner-operator, your personal credit is really driving your business credit,” Horler explained.

Credit check companies such as Equifax are more sophisticated than in the past when it comes to tying personal credit to business credit, Horler added. “If you fall behind on your personal credit and think your business credit is still fine, it’s not.”