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Forklift financing – lifting its game
Wednesday, 25 May 2011 ( #515 )
Special Feature
The good news is that finance companies see the materials handling sector as one to watch. Reports of solid growth and predictions such as that from the latest MHIA report, forecasting growth of 11% to 12% in materials handling equipment orders over the next year, have encouraged financial institutions to build a more substantial presence in the sector, according to a recent report in UK asset finance magazine, LeasingLife. US equipment leasing company First Financial Corporate Services, with a portfolio of assets worth USD89 million, lists materials handling equipment as its third-largest asset class and growing. Another American leasing company which concentrates solely on the materials handling sector in the US, Pacific Rim Capital, has set up an office in Ireland which has reciprocal trade agreements with 22 other countries in a bold bid to expand its business.

In the UK, Tim Waples, president of The British Industrial Truck Association (BITA), comments: "The balance has tipped in favour of the UK forklift market. 2010 orders rose by 23.9% and this year’s first quarter is up 27.7%, year on year. 2011 could yet beat previous expectations as stronger manufacturing output stimulates investment spending, generating orders for the forklift trucks that will be required to move merchandise."

Through the global financial crisis (GFC), companies tended to hold onto ageing forklift fleets, extending existing leases rather than renewing fleets and signing new lease agreements. Shari Altergott, spokeswoman for Associated Material Handling, a US fleet management group, explains: "We initially saw (post-GFC) an increase in service and parts revenue as customers got under-utilised trucks back up and running. We are now also seeing an increase in new trucks sales and financing as they begin to replace units to new more efficient ones."

Commercial and industrial loans declined dramatically during the GFC, particularly in the US. The level of borrowing and lending is still cautious worldwide but, in a number of countries, economic recovery and government stimulus packages, such as government-sponsored loans to small businesses and tax incentives, along with a range of flexible leasing packages, have encouraged forklift buyers to seek or renew finance. Altergott says that continuing low interest rates (in the US) have permitted some manufacturers to offer low-rate, fixed financing and leasing.

In the US, the government recently announced that it was extending the bonus depreciation bill until the end of 2011. Under the bill, businesses can write off 100% of the cost of depreciable property to the value of USD2 million. Jeff Rufener, vice-president of marketing at Mitsubishi Caterpillar Forklift North America (MCFA), believes that these types of incentives encourage operators to upgrade their fleets. "We absolutely believe that an additional generous tax deduction could help motivate incremental purchases," he says.

Dave Mirsky (COO) and Marc Mill, president of Pacific Rim Capital
Many in the finance and leasing business in the US believe that government loans and incentives have come just at the right time. Dave Mirsky, chief operating officer of Pacific Rim Capital, believes that through the GFC, finance remained available for the credit-worthy, but not for smaller, more risk-sensitive companies. Eric Gabriel, manager of fleet operations and financial merchandising at MCFA, agrees that "credit is out there for our credit-worthy customers, but an injection of capital to small businesses, certainly has to have some impact on demand".


Changing of the guard

Early in the GFC, many of the larger third-party lending companies such as GE Finance and CitiCapital exited the materials handling market, while those remaining - such as Wells Fargo, De Lage Landen (DLL) and Hitachi Finance - tended to focus their efforts on existing manufacturer programs.

Bill Heston, vice-president of First Financial Corporate Services, believes that the demise of many lending companies left a space for niche lenders whose main customer group is end-users, dealers or smaller manufacturers.

"Niche lenders tend not to compete against DLL or Wells Fargo, but against local banks and other outside sources", says Heston. He believes that banks don’t understand the needs of the materials handling market as well as the niche lenders do.

However, not all would agree with that analysis of banks’ lack of industry knowledge. Aldermore, the UK’s most recently established bank, "specifically established a materials handling division in its core vertical, because it saw a void to be filled", says division head Andrew Woodward. He also believes that the bank’s dedicated division has the skills to service the industry.

The exit of the larger lenders from the market has also meant that medium-sized financial corporations which had previously kept a local profile can now look to expanding their markets. Pacific Rim’s Mirsky explains that during the GFC, his institution’s strong and established customer base actually afforded it expansion opportunities and lines of credit. Pacific Rim now plans to transfer its leasing services for companies in North America, such as Toyota, John Deere and Komatsu, to Europe.

Finance fundamentals

What is apparent is that in these times of opportunity and competition, there are certain fundamentals that customers should look for - whatever the size of their requirements. Most leasing providers agree that good client relationships are vital, as is an intimate understanding by the finance provider of the materials handling sector. Aldermore’s Woodward believes that the industry is a "complicated beast" and an understanding of fleet and service needs is essential. He also recognises the value of flexible lease contracts which allow the customer to set realistic operating hours over the length of the lease; leases which allow equipment to be added and removed as required; and a service that lowers operating costs through efficient management of fleets.

MCFA’s Gabriel believes that "customers want convenient, one-stop shopping that includes a combination of the equipment, competitive maintenance solutions and a financial structure that’s tailored to their needs".

Lessors no longer want to be stuck in the traditional and rigid 36-, 48- or 60-month leases based on customers changing over their entire fleets at those intervals. Such leases no longer meet customers’ needs or economies. Bill Buckhout, marketing manager for Raymond Corporation, adds that hybrid financing is a better option. "Sameness doesn’t happen anymore, things are changing too quickly," he says.



Leasing Options

Across the globe, there are almost as many leasing options as there are types of forklift. "Leasing provides a valuable source of capital," explains Gabriel. "It can provide 100% financing at fixed rate with level payments. The residuals will still result in lower monthly payments, and the lessees are still going to have the flexibility to return the asset. It also means that a business doesn’t have to dip into their own cash reserves."

The majority of large fleet leases are organised at point of sale, with buyers making arrangements through dealers via finance through the manufacturer. Many of the larger forklift manufacturers supply their own in-house financial leasing services, not only for their brand but often for other manufacturers’ equipment as well.

Altergott believes that leasing behaviour hasn’t changed much, and large accounts with access to large amounts of capital will typically purchase equipment, while smaller to mid-sized accounts will generally rent or lease equipment. "The only variable causing more companies to look at purchase/finance versus leasing is the tax benefits (accelerated depreciation) provided for 2011," she adds.

Variables such as credit history, size of the transaction, perceived risk, structure of the deal and the type of equipment will generally be factored into the lease to determine the interest rate.

In the US, Pacific Rim Capital offers customised lease packages based on hours of use over usually three to five years rather than on fixed calendar months. The most popular leasing arrangements are operational leases. These are leases where the lessor "rents" equipment over a specified time for a specified fee. The contract is usually for considerably less than the life of the equipment. The lessee can agree to be responsible for the maintenance and service of the equipment (service lease) or, as is often the case these days, service is factored into the contract and outsourced. Most operating leases are cancellable, meaning that the equipment can be returned if no longer needed or upgraded if it becomes obsolete. Residual value is assumed by the lessor.

Mirsky believes that operational leases are economic and competitive for the customer and should the client prefer to buy equipment, they would do so up front.

All contract terms are negotiable, he adds. Asset management tools, including client access to lease documents, fleet information including equipment serial numbers, accrued working hours and billing, are offered in the PRC lease agreement. Interest rates for equipment are competitive and are calculated on interest rate swaps, rather than on government borrowing rates which don’t reflect "the true cost of money". Current equipment rates in the US range between 3.5% and 5.5% (at time of publication).

Woodward explains that in the UK, Aldermore Bank offers two main types of leasing arrangements for its MH clients – fixed-term contracts and minimum-term contracts. In a fixed-term contract, a client signs onto a fixed contract for a specified period of time and the equipment is then taken back by the supplier. A minimum-term contract, which Woodward finds is the more popular of the two, involves the lease running on indefinitely until the client gives notice. Woodward says that bespoke leasing arrangements are also available for larger clients. He sees interest rates are "much of a muchness", noting that it is service and the overall leasing package that seals the deal.

In the UK,  interest rate charges for equipment appear to operate on three levels. The main funders charge between 6% to 8%, depending on the size of the contract, stability of the franchise and dealer potential. Charges are usually higher for used forklifts as there is a higher default rate on used equipment. The second tier of funding charges from 11% upwards but will take on higher-risk end-users. The third level of funding is through brokers who place business with a range of financial funders with rates ranging from mid-7% upwards.

In Australia, Ian Ogilvie, director of finance brokerage firm MHF Finance, recommends tailoring a package to meet individual needs. MHF offers three main leasing arrangements: chattel mortgage/commercial hire purchase agreements, finance leases and operating leases.

Ian Ogilvie, director of MHF Finance
Chattel mortgages/commercial hire purchase agreements mean the lessee owns the equipment. Interest and depreciation is calculated and payable at the end of each financial year and is tax-deductible. The client can calculate the residual value of each piece of equipment to 25%-30%. This type of arrangement, says Ogilvie, gives the client more flexibility.

Finance leases are less flexible, he notes. The total payments are tax-deductible but the residual value of the equipment is set by the lending bank and the Australian Taxation Office.

Like Mirsky, Ogilvie finds that operational leases are the most popular type of lease, particularly with his larger public company clients which don’t want the responsibility of having to dispose of the asset at the end of the lease. Operating lease payments are deductible at the end of each financial year and must conform to Australian accounting standards.



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