My education as a civil and environmental engineer, plus 20 years in the real estate development industry, has provided me with valuable project management and problem-solving skills — a rather uncommon preparation for the finance business. I joined Vision Financial Group Inc. in 2017, a company started by my father in 1991, and set forth to learn about equipment finance.
Now having fully transitioned from the engineering world to the finance world over the last six years, during which time I obtained my Certified Lease Finance Professional Certification, my expertise has shifted from analyzing pipe diameters and protected tree species to understanding the different types of equipment finance solutions available to United States businesses.
The purpose of this series is to provide an overview of the types of equipment finance solutions available in the market, as well as tips and strategies to help guide you through the financing approval process.
Before we discuss the different equipment finance solutions that are available, we will identify the types of equipment and software in the propane industry that are common financeable capital expenditures.
- Vehicles — bobtails, crane trucks, service trucks and vans, work trucks, transport trailers
- Tanks — bulk storage facilities,
- storage tanks
- Autogas — vehicle conversions, refueling stations
- Tank monitors and monitoring software
- Logistics/route management software
- Cylinders and cages
Some businesses will use cash to acquire these assets instead of finance options. While that is a viable solution for some capital acquisitions, this article will focus specifically on financing options available in the propane industry and why companies may choose these different options and in which scenarios. Primarily, companies choose to finance equipment and software to preserve cash, facilitate growth and maintain working capital.
There is a general misconception that companies that utilize financing cannot afford to buy equipment. Approximately 80% of U.S. companies finance equipment. Every year, American businesses, nonprofits and government agencies invest over $1.6 trillion in capital goods and software. Some 60%, or $1 trillion, is financed through loans, leases and other financial instruments.
Some of the different types of equipment financing methods that companies typically utilize include loans, leases and rentals.
A loan is a form of debt where one party (lender) agrees to lend money, usually for collateral, that is given to another party (borrower) in exchange for future repayment of the loan value, plus interest and other finance charges. A loan can be for a specific, one-time amount, or it may be available as an open-ended line of credit up to a specific limit. Loans come in different forms like personal, commercial, secured and unsecured loans. Loans are useful when a company wants to retain ownership of the asset or is seeking an open-ended line of credit. Loans can have floating or fixed rates, are typically utilized for assets that have a long, useful life and are most often structured with a down payment.
A lease is a transaction in which use and possession of, but not title to, tangible property is transferred for consideration. In a lease structure, the lender (lessor) owns the equipment and contracts with the borrower (lessee) for its possession and use over an extended period. There are several different types of leases:
- Capital lease — A lease that has the characteristics of a loan and is required to be shown as an asset and related obligation on the balance sheet. Capital leases can be utilized in the same way as loans from an accounting perspective. The borrower (lessee) owns the equipment at the end of the term and can depreciate the value of the asset. Capital leases offer more flexibility in monthly payments and often do not require a down payment.
- True lease — A lease that entitles the lessor to qualify for the tax benefits of ownership and the lessee to claim the entire amount of the lease rental as a tax deduction. A true lease, also known as an operating lease or fair market value lease, affords the lessee greater flexibility at the end of the term, which may include returning the equipment to the lessor, continuing to finance the equipment or purchasing the equipment. There are net after-tax advantages and no increase in current company liabilities.
- TRAC lease — A lease on a qualified automobile, truck or trailer that guarantees the residual value. A TRAC lease affords the lessee the tax advantages of a true lease but guarantees the residual value at the end of the term.
- Rental agreement — A short service lease, usually less than 12 months in duration. Rental agreements are utilized typically in short-term finance situations, or in a rental with purchase option (RPO) scenario. Rentals are typically offered by equipment manufacturers but can also be documented by the lender.
To determine which equipment finance option is most suitable for your business, you should consider the following:
- Cash flow — What are your cash flow needs? Propane companies generally have higher revenue in the winter months. Often, seasonal payments can offer more flexibility and meet fluctuating cash flow needs. Perhaps you are installing several 500- and 1,000-gallon tanks at customer locations, but may not recognize revenue until installation is complete, tanks are filled and customers have been billed. Step payments with lower monthly amounts due for the first several payments may be beneficial. Leases tend to have more payment flexibility than loans.
- Tax and accounting needs — Do you want to own and depreciate the asset and show this as an obligation on your balance sheet? If so, a capital lease or loan would be useful. However, if you prefer to claim the amount of the lease payment as a tax deduction, a true lease, rental or TRAC lease would be necessary.
- Useful life — What is the useful life of your asset before it may require more than routine maintenance? True leases and TRAC leases are often used in the propane industry for companies that desire to replace their assets on a predictable basis to eliminate maintenance costs and wear and tear. Additionally, employees love driving a brand-new bobtail or forklift. Alternatively, large steel tanks may have a useful life of more than 50 years. Utilizing a capital lease or loan structure would be useful because depreciating an asset like this would be beneficial. As an alternative to purchasing a new bobtail, some companies utilize older barrels, which are refurbished and placed on new cabs and chassis due to their long life.
- Equipment upgrades — Tank monitoring is an efficient way to modernize propane deliveries and is a technology that is always improving. A rental structure for tank monitors may be effective to allow for future equipment upgrades.
In the propane industry, having the newest and most updated equipment and technology allows companies to deliver services on time and grow their revenues. Having the best equipment is paramount to success and competing in the marketplace. Equipment financing is an important tool to utilize when operating a business.
The next article in this series will address tips and strategies to help guide you through the financing approval process.
