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Time to Replace or Upgrade Your Equipment? Here Are Some Financing Items to Consider


As spring approaches, so does the hope of a brighter financial outlook. As lenders are coming out of the recession of 2009, more are willing to discuss lending into projects that meet their selective criteria. If you are looking to replace or make a major equipment purchase over the short-term, knowing what each lender’s criteria is and how they differ will improve your chances of success.

If you have been dealing with a finance provider and they have been with you through the most recent downturn, they should be your first point of contact. It is important to leverage existing relationships before pursuing other options. Lenders are willing to finance transactions, but  are calculating associated risks very carefully. Ultimately, lenders prefer to deal with companies they know and have worked with before. We would not recommend changing lenders when looking at a large ticket transaction, unless you have no other option.

Within the forestry sector, there are quite a few types of lenders and financing options you may encounter. They include:

  • Bank and Credit Union Financing – Banks and Credit Unions underwrite loan facilities in a very similar way so we have grouped them together.  Typically, Banks will lend into the cash flow of a company and then secure the loan with relevant assets, either those being purchased or those already on the balance sheet of the company. When a Bank or Credit Union is considering a finance request for equipment purchase they will likely be reviewing the entire leverage position of the company. Not just the equity in the transaction. If that leverage position falls within their comfort parameters (usually $2 to $3 in debt for every $1 in equity) they will look favourably at the request and will consider financing at higher levels in relation to the purchase price of the asset. This is all precluding that the company has shown reasonable cash flow to be able to service the additional debt levels being considered. Banks will usually lean on historical cash flows as analysis for these types of transactions. They may do some sensitivity analysis on best and worst case scenarios for large transactions. When the lender is one which the company has a history, the need for a deep supporting business plan isn’t as great but there should still be an outline presented that explains the rationale for the purchase. On the other hand, if you have a company with a large amount of debt relative to equity on the balance sheet, banks will typically shy away from financing into those situations or companies that have a large amount of equipment financed or leased through Equipment dealers or Leasing Companies. The leverage in these companies is typically higher and as such, this makes it more difficult to get a bank to lend to those companies.
  • Finance Divisions of Equipment Manufacturers and Dealers – Typically, these used to be the quickest source of financing for business owners because they only looked to the piece of equipment for security on the financing with the potential of a personal guarantee to augment the security.  However, since the recession hit last year, the financing divisions of these equipment companies have found it more difficult to raise capital themselves. This has made it more difficult to provide financing to the purchasers of their equipment.
  • Leasing Companies – The majority of leasing companies in Canada are actually a subsidiary of a U.S. parent company.  As such we saw a large number of leasing companies either exit the Canadian market or substantially reduce the number of new transactions. There are still some leasing options through Canadian banks and some lenders are still in the market. They typically look to the asset as security and will review the cash flow of the company to make a determination on financing levels. They will typically finance at a higher level that Non-Bank term lenders.
  • Non-Bank Term Lenders –These are lenders who focus primarily on the asset in question. These types of lenders usually do not focus as much on the balance sheet of the company owning the assets. They will finance based on their belief in the value of that piece of equipment and the cash flow of the company to repay the debt.
  • Debtor in Possession Lending– This is another class of Non-Bank Term Lenders. This type of lender is usually used by finance professionals to assist their clients who might be in financial difficulty and need a bridge loan to get them through a difficult time, until things turnaround. However, they will charge rates at the top end of the market and it’s not uncommon to see rates in the low ‘teens, even with a very low prime rate. They lend based on their comfort with the liquidation value of the assets in question. They can also be used to finance higher leverage companies but the pricing can be high.

The piece of advice we always give is:  Keep close to your sources of financing. Ask them how they underwrite their transactions and how your company  fits with their criteria. Keep them in the loop on what you are considering. While they might not give you a pre-approval, like a home mortgage, you can get a feel for their appetite for your financing early on. Keeping those lines of communication open will allow you get a feel for whether your own traditional sources of financing are going to come through or if you should start the process of looking for alternatives.

For more information on the outlying factors that can affect your corporate financing outlook, contact your local MNP advisor.