Bucks For Trucks!: How to get the cash you need to stay on the road
by Allan T. Duffin
This is Part 1 of four articles in a series on financing towing equipment and businesses. As banks, the SBA, and other financial institutions begin to ease their restrictions on lending, towers who need business capital and to make equipment purchases should be ready to take advantage of the financing opportunities as they open up. This series will help guide small business owners who need cash infusions in order to continue to survive and thrive.
Tow trucks are the essential tools of this industry, but the rocky national economy — which in 2007 plunged into a recession that ended last year, according to the National Bureau of Economic Research — has taken an axe to the credit status of many towers, ruining their ability to obtain financing for truck and equipment purchases. With lenders keeping a tight hold on their purse strings, towers aren’t getting the financing they need to keep their businesses rolling, and many dealers are having trouble moving their inventories of tow vehicles and larger items of gear and accessories.
The nation’s financial situation “has left many towers — and businesses in general — looking not as strong financially,” said Vincent Diglio, chief financial officer of Channel Islands Leasing & Loan in Ojai, CA. The company provides financing for commercial equipment and specializes in trucks and trailers.
“The economic downturn has dealt a fatal blow to many companies, while inflicting significant damage to others,” noted Amanda Adolf, owner of Preferred Towing in Castaic, CA. “The survivors are now looking at ways to boost their bottom lines to reach profitability goals.”
Tough & Tight
After a credit-crazy period where — thanks to a housing boom driven by easy lending — it seemed like almost anyone could obtain financing, things have changed dramatically. “It is tough to find available capital in the current market,” said Adolf. Many banks and financial institutions are now out of business and counting their losses from failed sub-prime endeavors, she added. “Banks and lenders that do have money to lend have severely tightened their credit requirements, leaving many business owners unable to qualify for traditional financing.”
Jeffrey Godwin, vice president of FTI Groups, Inc. — the owner/operator of towPartners — and towXchange, Inc., has kept careful watch over the financial market and its effect on the towing industry. Established in the late 1990s, towPartners was designed to bring better pricing and quality service benefits to towing and road service companies of all sizes and to those employed in the industry.
Although things are rough right now, Godwin provides some hopeful advice. He points to three possible options available to towers: cash, leasing, and financing with their banks. “Strong relationships with banks are a great resource but may want to be saved for miscellaneous operating expenses,” said Godwin. “If a company needs basic operating cash and they have already used their line of credit, it can put them in a tight spot.”
Leasing is probably the best option in most cases, continued Godwin, because “it is set for an exact amount, for an exact amount of time, and provides stability in business operations.” Adolf, who launched her California towing business in 1998, agreed.
“Equipment leases provide some of the most flexible commercial financing terms available today,” she said. “While businesses struggle to avoid a fatal blow, equipment leasing may offer some relief.”
Diglio notes that financial firms understand the difficulties that towers are facing. “So we try to look past the financials of last year to what's happening now,” he said. Diglio points to two areas where towers can help make themselves appear stronger financially — and, ultimately, more creditworthy. The first thing to do, according to Diglio, is to keep as much money in the company bank account as possible. Financial firms look at current bank statements when determining the creditworthiness of a client. “If we're Looking to see if a company has weathered the storm, we don’t want to see that they just have $68 in their account,” noted Diglio.
A second thing that financial firms scrutinize is a tower’s credit card situation. “We look at the amount of money that is owed on credit cards,” said Diglio. “In the finance world, anything above $20,000 is considered a red flag.”
For example, if a towing company owner is carrying $50,000 on his or her credit cards, “we’re going to be wondering how a tower can afford a new Truck if he can’t pay down his creditcard debt,” explained Diglio.
Godwin agreed. “First and foremost,” he said, “understand your credit. A lot of customers don’t stay on top of their credit enough to understand. A simple, small collections account can really drive down the possibility of getting the best rates — and even getting financed,” added Godwin.
Loan Or Lease?
For towers who don’t want to lease, what else is there? “For towers who are credit-challenged, a loan or lease doesn’t make a difference,” said Diglio. “It’ll be the structured terms that’ll matter. For instance, how much money they are asked to put down.”
Diglio noted that most finance companies may prefer to use a lease contract with a customer who is creditchallenged This arrangement provides more protection to the finance company, just in case the tower has difficulty paying the bills.
Diglio preferred to leave picking the appropriate type of contract to each individual tower’s accountant, but he did have some thoughts on the matter. “Ever since 2001, the IRS has allowed for bonus depreciation methods that may favor loans over true leases,” said Diglio. Times certainly have changed. “Prior to 2001,” explained Diglio, “90 percent of our business was in leases,” he said. “But since then we’ve been writing 90 percent of our contracts as loans.”
If towers need advice or information about what to do, a number of good resources are easily available. Some of these resources can help towers get a Loan — or just help plan to apply for one in the future. “Reach out to associations and other organizations that you might be a part of,” urged Godwin. “Fellow colleagues who have used specific services will have great advice.”
Godwin also recommended that towers touch base with industry organizations like towPartners, which has linked up with Direct Capital, a financing company based in Portsmouth, N. H., to provide leasing solutions for towPartners members. Direct Capital, which has loaned over $1 billion during its 17-year history, provides financial products such as capital loans, equipment financing, and merchant cash advances.
Even if you’re afraid of being turned down, don’t be afraid to talk directly to financial companies, said Diglio, such as his own Channel Islands Leasing & Loan. He invited towers to speak to one of his company’s representatives.
However, if a client is “really creditchallenged,” said Diglio, “the government has incentivized the community banks...to give loans by guaranteeing the loans up to 75 percent from funds allocated out of the bailout fund.”
Because of this federal backstop, Diglio explained, clients should expect community banks to be more aggressive in approving loans. However, people must remember that there is no mandate and the banks are free to make their own choices as to whether to give loans to customers.
Despite the gloomy economy, the financial experts with whom we talked are hopeful as they look down the road. “My outlook for the future is good, but progress will occur at a slower pace,” said Vincent Diglio, chief financial officer of Channel Islands Leasing & Loan, Ojai, CA. “There is no quick remedy to remove this country's deficit, and there isn't a quick fix for the construction industry, which used to drive a good portion of the economy.”
However, added Diglio, with foreclosure stocks dwindling over time, development and construction will come back slowly, just as the economy will. All of this activity will in turn trigger reductions in the federal deficit. And that’s good for everyone.
So even in this financial climate, should wary towers, perhaps even those lacking very strong credit, go after a loan for new trucks and equipment? The times may be right for taking the plunge so long as you watch your credit and bank account closely and base your actions on the advice of a good financial advisor. You might just get the financing you need to add a new tow truck or equipment to your company.