For motorcoach operators, every purchase of a new piece of equipment is a major investment, taking into account the average price for a new motorcoach is around $500,000 to $550,000. Here, finance industry experts discuss best practices for financing a new or used piece of equipment, which may be helpful for both new and seasoned operators alike.
1. Develop a business plan
Like the old song goes, do you know where you are going to? Developing a business plan is not only a good tool for you to map out where you want your business to be in three or five years, it also helps your finance company know that you are as good a businessperson as you are an operator.
“[Having a business plan] helps you demonstrate that you have a good handle on your business,” explains Peter King, VP, specialty markets-motorcoach, for TCF Equipment Finance. “We don’t necessarily ask for the business plan, but they should have one, especially a new operator.”
Having a business plan will also help you track when you may need to add a new vehicle or replace an existing vehicle, which essentially can help you justify making such a significant purchase.
“You have to know the reason that you are buying a vehicle,” says Lee Steinberg, regional manager for Advantage Funding. “Honestly, it has to be justified from an operational and financial standpoint. I’ve had it happen to me way too often, where an operator tells me that if they had more coaches, they could do more business, and that doesn’t work.”
For new operators, sharing your company’s story may also help during the financing process, explains Amanda Lundmark, assistant VP, bus division, for 1st Source Bank.
“It’s possible that a new operation has only been in business for just five years, but the owner may have been in the industry for 20 years or even grew up in the family business,” she says. “Whatever that story is, sharing it with your finance company could help paint a clearer picture for the credit underwriter.”
2. Buy what’s best for you
How much usage do you plan on getting out of the vehicle? The financing term on a new vehicle typically runs five to seven years, so it is important to have a business plan that will help you know for sure that you can make use of a new vehicle for at least that long. If not, perhaps a used vehicle at a not so insignificant lower cost and shorter financing term could be a better answer.
“How long do you plan to hold on to the equipment? [Operators want to] try to match the finance term reasonably close to that need,” says King. “I am a proponent of paying off equipment as quickly as possible without putting a strain on cash flow. That way you have more flexibility and you build equity in your equipment faster.”
While the cost and financing term could make used vehicles appealing, there are some factors operators should still keep in mind.
“It’s fine to finance a used vehicle, you just have to make sure it’s not ‘used-up,’” says Lundmark. “I recommend that operators evaluate the age of the vehicle and its mileage and then, talk to a banker to see how long a term they can offer for financing.”
Although it may differ from finance company to finance company, most will finance used vehicles going back seven to 10 model years, whether the purchase is from a dealer or is an operator-to-operator transaction.
One possible plus for operators is that the cheaper price of a used vehicle, means they will probably have to provide less financial data to the financing company. Some financing companies have an “app-only” limit of about $300,000 to $350,000.
3. Know your options
Although there are plenty of options, the two most popular for operators remain traditional loan financing and TRAC Leases.
“Traditional loans are useful if the operator can utilize the depreciation tax benefit. However, if the company cannot make full use of the tax benefits then a TRAC Lease can be a favorable option,” says King. “With a TRAC Lease the bank retains ownership of the asset during the term and takes advantage of the tax depreciation benefit. The operator then treats the monthly payment as a rental expense. This allows the bank to offer a more favorable rate to the operator.”
In addition to the lower interest rate, Lundmark adds that another benefit of the TRAC Lease is the possibility for the operator to keep the vehicle off of his or her balance sheet. She also explains what the benefits are to traditional financing of the vehicle instead.
“A loan enables an operator to take advantage of depreciation on their balance sheet, which some customers like because it’s a little clearer,” Lundmark says. “I will explain the benefits of each of their options, but will always refer them to their accountant, who knows their company well and can recommend what is best for their particular business.”
There are a handful of other financing/leasing options, and even some that are unique to specific regions. Simply sitting down with your financing officer and discussing your options will help you and your operation decide what’s best for you, which leads us to our next tip…
4. Choose a lender wisely
There are many options out there, but choosing a company with experience with the motorcoach industry is extremely important.
“All I do at TCF is work with our motorcoach customers, so I know the market and how operations work,” says King. “We are also able to do things that a bank without an equipment finance division might not be as inclined to do.”
Because of the smaller, more specific nature of some of these financing companies, it may also be easier to build a one-on-one rapport and receive more personalized service.
“We can advise the customer on the best way to approach the equipment acquisition, whether it is a lease or a loan, or whether they should be looking at late model used equipment versus new equipment, as well as the different terms that are available,” says Steinberg, who has been in the motorcoach industry for more than 30 years. “It’s a matter of trying to offer the most personalized service that I can to help the customer make the best decision, versus going to a bank and taking their canned product, whatever it may be, because that’s all they offer.”
5. Paint a clear financial picture
So, you’re all set. You have identified your need for a coach, have a plan for how it will be used, decided if you need a new or used vehicle, and chosen your lender carefully. One more thing, do you have all your financials together?
“It’s very important to have a complete and up-to-date financial package available for the lender,” says King. “Have your current year’s tax return available as soon as possible. Don’t file for an extension unless it’s absolutely necessary. Lenders want to get a clear and accurate picture of how your company is doing when making an evaluation to extend credit.”
It’s not uncommon that an operator may have filed so many extensions that they haven’t actually filed their 2015 taxes, even though 2017 is right around the corner. If that is the case, our experts suggest keeping quality financial statements.
“Some operators put together an Excel or Word document that is vague and incomplete. It doesn’t really look like financial statements,” says Lundmark. “If you send that to a bank, it’s going to raise additional questions and could delay the credit-decision process.”
Going back to developing a business plan, having financial statements on hand will let you know where you and your company currently stands, says Steinberg.
“Whether it’s for external or internal use, it’s very important that operators understand where they sit, and preparing financial statements on a regular basis will allow them to see if they are or aren’t making money,” he says. “Not preparing them at all is actually a trigger on the lender side to possibly view them as an issue.”
One last note would be to simply call ahead and find out what the app-only limit for that financing company is and have everything together when you are set to meet with them in person. Also, don’t forget to be up front about what your timetable for purchasing the vehicle is. Financing companies can generally work pretty quickly, but if you need the vehicle more immediately communicating that to your lender can help them possibly expedite the process to some degree.
This article originally appeared in METRO Magazine in December 2016.