Garry Bartecki Financial markets and how it will affect you
This is our annual review of the Banking, Rental, and Leasing markets. Where they are and where they are going. All in all, things look pretty good with a qualifier regarding inflation, interest rates, and a potentially dangerous upswing in the new COVID-19 variant. Boy, that is quite a swing in expectations which basically suggests you plan conservatively, take advantage of short-term opportunities and keep looking over your shoulder to see what is creeping up on you.
Let’s start with the BANKS.
A fair percentage of banks are loosening up their credit standards for commercial loans, real estate loans, and consumer loans. But, on the other hand, many are reluctant to work with problem loans as they may have in the past. In short, trusting your bank right now may not be a smart thing to do, and maybe you should be shopping around to see which bank may have more interest in your company, is familiar with the industry and understands the industry cycles we all go through, cycle after cycle after cycle and still make it to the other side. You would be amazed how many bankers lack the knowledge of how your cycles work and what you do to manage them. Today, at the first sign of trouble their first thought is to send the loan to the “work-out” section who will suggest you sell everything and send the proceeds to them. Sounds like 2008-09 to me.
With interest rates what they are I would suggest you look at refinancing any loan with more than a 3-4% rate attached to it. You don’t get it unless you ask. That would go for vehicles, real estate, inventory loans, and rental equipment. There is a lot of money out there looking for a home. I would also ask what they could do with customer equipment financing if they are offering up attractive rates. And if you have the ability to “buy down” the rate to make your major proposals more attractive that could be a good thing.
A recent experience I had kind of indicates what is happening out there. My SUV 36-month lease was ending with a $17,000 residual if I wanted to buy it out. Not being able to find anything I liked with the current vendor. I searched around other vendors and found another 36-month lease where the car had a 67% residual. Not bad! And then I took my current vehicle to CARMAX for an appraisal and they said the trade was worth $22,000. I could not believe it. So, then I marched into the dealer and said I need another $4,000 on the trade and got it. In the end, I wound up with a 36-month lease car payment of $315 with a sticker price of $31000. The high residual and 2.3% interest rate in the lease did the trick. As I said, don’t ask…. don’t get.
No matter how your finance your inventory and rental fleets you will doing yourself a favor keeping track of the FMV and OLV of the units you own. Needless to say, the banks got really scared when equipment values tanked and are still not to where they were pre-pandemic. You know it and I know they will come back to where they belong, especially with a shortage of new units which forces up values of both units owned as well as rental rates. I suggest an annual valuation of all owned units which support your bank loans as well as provide any “built-in” equity you have in the fleet. Having these values handy not only helps you out but also your customers who need to supply a value for units they are purchasing from you.
On to Leasing Companies
Leasing companies seem ready to rock and roll, believe that both construction equipment and material handling equipment are ready to entertain a healthy period of growth. Nice of them to believe that but it really comes down to each dealer’s customer mix to see if the growth potential falls into their individual market. It may or may not. The point here is not to assume and make financial decisions thinking the industry will grow over the next 12-18 months without doing your homework within your market that will support that belief.
Leasing still has a benefit over purchasing because there are numerous ways to structure a lease that you could probably not do through bank financing, not to mention the cash savings available with a lease over a bank loan. Some of those benefits, however, will be diminished when lessees need to be capitalized on your financial statements (supposed to start this year I believe). As indicated by my auto deal the current interest rates available kind of makes the buy-lease question a non-starter. And once the leases are reflected on your balance sheet it is time to trust your bank because they told you not to worry about it because this accounting change will not impact your covenants. Somehow, I do not believe that. As I have mentioned in the past you may want to review this question now before the new format hits your statement and their underwriting desks.
Rentals took a hit in 2020 and are finally recovering in 2021 with an expected catch-up carrying over into 2022. I am expecting an increase in overall rental activity because with the new technology being added to equipment every year it makes more sense for users without sophisticated maintenance facilities to rent versus buy the units, also supported by a lack of skilled employees to maintain the equipment. In addition, many users are more balance sheet conscious and wish to avoid debt service and invest instead in more technology to make operations more efficient and more profitable. Cannot say I disagree with this approach which should support your lease with maintenance programs going forward.
Out of the three segments of the financing world we are discussing rental took the biggest hit from the bankers. When the bulk of your assets is made up of your rental fleet the related reduction in OLV and FMV made the bankers went crazy even though the cycle data showed the swings associated with the rental industry and how they eventually come back to where the collateral values are in sync.
And More
But no matter what business you are in most companies today have employee issues, which if they are not solved, will produce negative impacts on operating results and business valuation. To help solve this problem companies are now expanding their HR functions to help find, hire, train, compensate, and wants to learn the business and make a long-term commitment. In fact, the number one administrative employee folks are looking for is HR personnel who can deliver on what is outlined above. In other words, HR departments will become major players in terms of hitting financial goals in the future.
You have to deliver on:
- Competitive salary.
- Flexible all-inclusive benefit programs where an employee can put together what works best for them.
- Programs that allow for promotion along with the training to get there.
- Using social media to communicate with employees and their families as well as educate the employee regarding industry history and expectations.
- Provide internal technology to help manage the cost of these employee benefit programs.
I know of some companies that follow this path to find and retain staff. And from what I see they feel it works and helps attract new prospects who know current employees. And let’s not forget to give $500 to any employee who brings in a prospect that gets hired.
With the way the economy is headed and the need to meet customer requirements, there is no doubt that the “staffing issue” could make or break your goal for the next four or five years. Investigating a way to find and keep qualified staff should be on every CEO’s shortlist of what needs to get accomplished in the next six months.
Stay safe.
About the Columnist:
Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail [email protected] to contact Garry.
