By Eric Miller
There is no getting around the fact that we live in a world where customers feel they need everything yesterday. No matter where they are, customers want to click a button and have their purchases show up shortly thereafter. These demands are driving investments in process improvements and new technology across the global wholesale and distribution supply chain. Thanks to technologies such as radio frequency identification, logistics companies can see granular details such as how a given forklift is being used every second of the day and use that information to optimize their business operations.
But one area where some companies have not yet optimized the value they get out of their business is equipment financing. All too often, I see companies jump from one lender to the next depending on who pitches the lowest rate for financing their equipment. In trades such as construction, there’s a robust secondary market where most equipment has resale value. Hard assets represent easy-to-quantify collateral, and lenders love to do those deals.
Wholesale and distribution, on the other hand, can be a different challenge. Here, equipment lenders are a lot pickier and more likely to pass up a transaction if it doesn’t fit their traditional parameters. Sure, if you need to finance transportation assets like trailers or forklifts, most lenders will be glad to accommodate you. But when it comes to many other types of equipment — such as conveyors, racking and shelving, or any customized piece of equipment made specifically for your company or facility — many lenders will decide to pass. This dynamic can create sizable gaps in wholesalers’ and distributors’ capital budgets, slow their rates of growth and prevent investments in other areas of the business.
Understanding the Business
The good news is there are lenders that are comfortable lending to wholesalers and distributors across all dimensions of their business. That’s because these lenders are willing to dig in, do the research and understand the details of the borrowers’ business. At the end of the day, an equipment lender needs to feel comfortable that it’s going to be paid back. If lenders have confidence that they’re lending against an asset that’s important for a business’ ongoing operations, they’re more likely to be willing to use that equipment as collateral for a loan, even if there isn’t necessarily a broad secondary market for it. It just takes more work to understand the role the equipment plays in the overall operation of the facility or company and how critical a piece of equipment is to that end.
When a lender finances any piece of equipment, it wants to know how critical it is to the overall business. If a lender is financing equipment for a warehouse that’s part of a larger distribution network, it wants to know what role the warehouse plays in the overall distribution system. If the warehouse handles a significant share of the company’s shipping volume or it’s much more efficient than other warehouses in the network, then its chances of being shut down are much lower.
As part of a lender’s due diligence, it should also seek to understand how specific companies and industries are likely to weather the business cycle. How did the borrower fare during past economic downturns? What specific steps did it take to mitigate any losses and return to profitability? This information helps a lender prepare for slowdowns in business activity and position itself to work with borrowers if headwinds appear. Lenders that are less familiar with the sector or company might be more likely to call in the loan or tighten their financing terms at the first sign of weakness.
For this reason and others, it’s best to work with a lender that is interested in a long-term relationship. A lender that can extend financing across the broad sweep of a client’s needs has the potential to become be a true partner to the client and devise flexible solutions tailored to their individual needs. Not only that, it can provide additional financing — a lender can assume more collateral risk if the assets it is financing are essential to the company’s overall value.
When it comes to equipment financing in the wholesale and distribution sector, the easy route might appear to be to take the lowest rate for each financing. But that strategy might leave additional liquidity on the table. No matter the financing need, you should partner with a lender that is willing to unlock the full value of your equipment and may be more likely to seek common ground when challenges appear.
Eric Miller is group head and managing director of CIT Capital Equipment Finance, where he is responsible for overseeing financing activities for large ticket equipment leasing and lending, as well as project finance related activities.