Warehouse and DC Management: Lift truck financing: Time to wheel and deal
Interest rates are low. Prices are right. Competition is high. If you’ll need to replace your lift trucks in the next 18 months, now’s the time to lock in a deal.
By Tom Andel, Contributing Editor -- Logistics Management, 8/1/2009
After this year, Ralph Petta might wish for a little boredom. Right now he’s witnessing events he’s never seen before—and hopes he’ll never see again.
As vice president of research and industry services for the Equipment Leasing and Finance Association (ELFA), Petta is among the first to see the numbers that are used to help gauge the status of productive assets in the U.S. economy. ELFA’s Monthly Leasing and Finance Index (MLFI-25) complement the monthly durable goods report produced by the U.S. Department of Commerce and the Institute for Supply Management Index, which reports economic activity in the manufacturing sector.
As this article is written, ELFA’s most recent numbers showed that overall new business volume for April declined by 42.5 percent when compared to the same period in 2008. Month-to-month new business volume decreased 12.8 percent from March to April, from $4.7 billion to $4.1 billion.
Bottom line for anyone anticipating adding to or replacing their lift truck fleet: now would be a good time. It’s a buyer’s—and leaser’s—market. In fact, Lift truck providers face the same reality their customers do—as inventory ages it devalues and they have to turn it over. That’s why leasing terms are more creative than ever and providers are more willing to work with fleet managers to build an affordable and sustainable leasing strategy.
“There’s never been a drop in demand for leased and financed equipment across the board as we’ve seen this year,” Petta says. “The entire first quarter of 2009 vs. 2008 shows a 30 percent drop; and our members are telling us that there are still problems across the board in the financial sector with companies having a difficult time accessing affordable credit.”
So, many lift trucks in the field are either being over-used or not being used at all—except for spare parts. Dealers don’t like that and want to help customers right-size their fleets and improve utilization and maintenance. Here’s a look at some of the predominant trends that could affect the decision-making process for any lift truck manager who’s about to enter the market.
Creative options
Bob Sattler, vice president of Hyster Capital, the captive finance company for Hyster Co., says that last year’s horrible fourth quarter forced the company to react differently regarding the cost of funds.
“Over the last three or four months we’ve seen lenders leave this collateral type because the returns became so low,” says Sattler. “In the past you had free flowing credit and now you’re seeing it very difficult to get C and D [clients] approved.”
Banks and finance companies, even those specializing in lift trucks, are trying to shorten terms while customers who want to ease cash flow are looking for longer terms. This is inspiring lessors and lessees to find creative compromises. For example, you can now negotiate a lease with low/high structures where the payments start out low and increase over time.
“If it will help a customer from a cash flow perspective, it’s certainly more attractive than your traditional sales agreement where the customer is just buying the asset and carrying it to their balance sheet,” Sattler says.
And while more and more creative financing options will continue to emerge, many of the experts contacted for this article agree that it’s often best to first make sure you’ve “right-sized” your fleet and keep it in good running condition. They contend that it’s better to be caught short a lift truck or two and have to rent a gap-filler now and then than to park lift trucks and pay for them to be idle.
More negotiable terms
Business is tough for buyers and lenders. That’s why lift truck providers are now more willing than ever to be flexible on the length of a lease. Darlene Harrington, lease marketing manager for The Raymond Corporation, says many of the leases quoted today are for seven-year terms.
“Some of our larger customers who used to be on a planned replacement are extending their leases for additional months,” says Harrington. “That’s been a surprise for us because we have had longstanding relationships with some of these customers who traditionally replaced every four years.”
The problem is simple: a slow economy means less material handling activity, therefore many more lift trucks are sitting idle. Instead of repairing the ones they use, many fleet managers are just replacing them from their inactive fleet. According to Harrington, these are the same users seeking to extend their lease terms.
And that’s why many experts stress that extending service life must be part of any lease extension. Whether that’s the responsibility of the user or the provider, maintenance is essential. Christina Goodwin, director of financial services and remarketing for Yale Materials Handling, says dealers are getting a lot more work through maintenance contracts.
“The larger national accounts are making sure they get, at minimum, the useful life of their equipment; and now they’re maybe going a year or two beyond that and paying a little extra to maintain that equipment,” she says.
Raymond’s Harrington recommends that in addition to considering a lease extension, fleet mangers should think about negotiating more flexible terms. For example, if a lift truck doesn’t last the full length of its lease, or if your business operations change, you may be able to return the equipment early or purchase early.
“We don’t rewrite our lease language very often,” Harrington says. “Now it’s standard practice for every lease to have some flexibility built in or some program offered. We haven’t seen much refinancing in the middle of a term but we are being asked to put trucks on extension a lot more today than replace the trucks.”
In fact, customers are even asking their providers to get them out of the lift truck management business entirely. “We’re being asked by managers of larger fleets if we would manage their fleets instead of having individual schedules and leases,” Harrington explains. “On top of the management, they’re asking if we can make recommendations to them when they need to replace a unit due to maintenance or hours.”
Harrington says her team is evaluating that for two or three of Raymond’s larger customers and trying to determine what that would mean for the company. It would certainly mean more information management for Raymond, as well as deciding what kind of information it could supply and in how much detail.
At the end of the day, all of this new flexibility means that you don’t have to be a Walmart-size client to negotiate a good deal. In fact, in this economy even smaller clients are getting unprecedented deals—but that won’t last forever.
Why make a move now?
Eventually, the business of selling and leasing lift trucks will regain its health. Yale’s Christina Goodwin believes that if customers delay purchasing equipment by a year or two we’ll be back in a seller’s market by that time and manufacturers won’t be working on the same deals they are now.
Another reason that now appears to be a good time to strike is the availability of Troubled Asset Relief Program (TARP) funding, the Federal government’s plan to free up lending. “Some banks have access to TARP dollars and can offer competitive funding, but it’s temporary,” says Richard Pipenhagen, national sales and marketing manager with Toyota Financial Services (TFS).
“We try to drive the point home that we are in a captive, long-term partnership through thick and thin with TMHU,” says Pipenhagen. “Right now [the banks’] entry point is very competitive, but 18 months from now those same banks may be very expensive or their credit criteria may be very difficult,” he adds.
Indeed, many borrowers and lessees that had no trouble establishing credit in the past may be surprised at the information expected of them to qualify for financing today.
“Be prepared to provide a lot more information than you’ve been required to in the past,” warns Eric Gabriel, financial merchandising manager at Mitsubishi Forklift Trucks. “Today, credit remains extremely tight—tighter than even a year ago.” So, make sure your credit record is spotless and your books are pristine because you may be in for some surprises if they’re not.
Captive or non-captive?
Most leading lift-truck OEMs have financial partners that administer their leases. For example, Mitsubishi has three: DLL, Wells Fargo, and GE Capital. Toyota Material Handling has Toyota Financial Services, which is a “captive” partner. Both types of relationships have benefits and drawbacks.
“Those with their own captive leasing company may offer more control, but on the other side you lose that element of competitiveness,” says Gabriel. “What we enjoy today in having multiple partners is that they’re competing for our dealers’ and customers’ business, and that drives down rates and drives up residuals. In this environment having multiple funding sources makes things a little easier.”
Toyota’s Richard Pipenhagen argues that being a true captive enables his team to collaborate on its offerings. “We partner with TMHU so we have certain rates as a captive that make it more attractive for the prospective Toyota customer to buy forklifts from the dealer body. Eighteen months from now a bank may be very expensive or their credit criteria may be very difficult,” he adds.
So, for fleet managers who are on the fence about diving into the market, there’s actually good news and a little bad news. The good news is the economy is recovering. The bad news is that the recovery will put a damper on some of the flexibility we just discussed. The overarching advice boils down to this: Make a move while you’re still in the driver’s seat.
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