Financing Construction Equipment: Create a Financial Plan for Better Opportunities

Experts say that the economy is beginning to turn around, and we’ve seen positive signs in the construction industry already. However, there is little argument that construction has been one of the hardest hit industries and that the business environment has changed.According to John Hughes, area manager for FCC (a subsidiary of Caterpillar Financial), even contractors who haven’t been hit as hard may find themselves facing new challenges as business picks up.

“Many contractors whose credit was historically sound with a strong balance sheet have seen erosion in their financial conditions,” Hughes said. “Finance companies are relying more on work under contract and less on historical data than in years past.”

This doesn’t mean that financing isn’t available, just that it may be more difficult and require more work from the contractor. “If they have seen their financial condition deteriorate from the recession, they can still be financed if they have a plan,” explains Hughes. “The plan may include (but is not limited to the following):  shedding under-utilized assets, selling assets that might be a drain on the company’s cash flow, shutting down divisions that are not profitable, switching work mix (from residential to commercial/municipal), reducing benefits, etc.”

Since buying, protecting and maintaining a fleet of equipment can account for a large portion of a contractor’s overhead, he/she should closely examine what they are spending and what the return on investment is for that equipment. One of the most common equipment-financing pitfall for contractors is extending terms unnecessarily. “This is why many contractors are facing problems today,” Hughes said. “Two and three years ago, contractors would often finance for maximum terms when they could have paid loans off in two, three or four years. Now they find themselves with negative equity in their fleets.”

Contractors who examine their fleet costs and realize they may be in over their heads should contact their finance company and see if there is any help available before a credit problem arises. Some companies are willing to work with owners to alter existing finance agreements and help them keep the equipment they need to keep working. “Cat Financial is quick to work with contractors on modifications to existing contracts or refinancing existing contracts to help contractors,” Hughes said. “These modifications may be full skip payments, interest only payments or partial payments for extended periods of time. The bottom line is that we want to work with our customers because we know our current customers are also our future customers. If we don’t help them through these difficult times today, who will be there to buy Caterpillar tractors tomorrow?”

Some owners may be considering selling their equipment or may have already sold it to get through hard times, leaving them to rent or buy new equipment when work picks back up. These owners should be careful when purchasing used equipment for their fleets. “The Cat dealer is a surefire way to ensure that the contractor is getting a unit that is sound and ready to work,” Hughes said. “Often times, purchasing from a broker or from an auction turns out to be purchasing someone else’s problem.”

Currently owned equipment can also be used as financial leverage in some cases when contractors need liquid assets quickly but may still need the equipment to keep jobs moving along.  “It does make sense under the right circumstances,” Hughes said. “Perhaps the company needs enhanced cash flow to match reduced revenue streams. There might be an opportunity to secure a large job, and working capital may be necessary to secure that job. Leveraging the existing fleet and tapping the equity is a perfect way to gain that working capital. The contractor may also have an opportunity for an acquisition of a competitor. Refinancing with working capital may allow them to capitalize on that opportunity.”

As business picks up and needs arise for new equipment and expanded fleets, contractors need to be aware that financing requirements and terms have changed. Success in this evolving financial climate will depend on a solid business plan and a healthy view of the company and its assets.

Construction Business Owner, May 2010