Money in the Bank: Full-Service Leasing Helps Keep Bank Credit Lines Open

Ordinarily, credit allows companies to expand their business, improve efficiency and diversify their operations so they can take advantage of new business opportunities. But overall demand for business financing has waned as the economy continues to work through a deep recession.

According to recent monthly surveys conducted by the National Federation of Independent Businesses, fewer of its members actually sought credit in late 2009 than two years ago. Also, “regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983,” according to the NFIB report’s summary. “A net 15 percent reported loans harder to get than in their last attempt, unchanged from November 2009.”

“Consumers aren’t buying as much, so many businesses find that they don’t have a pressing need for financing,” said Chris Maccio, Director of Sales-East for PacLease. “However, for those companies that must buy replacement vehicles for their aging truck fleets, finding competitive sources of funding remains a significant challenge.”

Many banks that tightened their lending criteria over the last two years haven’t unwound those stricter standards, even though the federal government’s Troubled Asset Relief Program provided several major U.S. banks hundreds of billions of dollars in an effort to spur more lending. According to a recent quarterly survey of U.S. bank loan officers conducted by the Federal Reserve, more than 94 percent of respondents reported their banks’ lending to businesses remains unchanged. This same survey found that banks tightened their lending criteria nearly every quarter over the last two years.

“In these challenging economic times, many companies find they must use existing lines of credit to pay bills or to make payrolls as their customers take longer to pay on their accounts,” Maccio said. “Or they must have access to ready sources of credit. That ready access will allow them to take full advantage of new business opportunities quickly should stimulus efforts by governments in North America and around the world boost the global economy. Even with good credit ratings, a surprising number of businesses both large and small find that banks scrutinize their requests closely. That’s why preservation of their existing credit lines is so critical to their operations.”

Fleets Turn to Full-Service Leasing as Financing Alternative

As financing remains challenging, Maccio said he is seeing more companies turn to full-service truck leasing as an alternative. Full-service truck leasing like that offered by PacLease allows companies to reserve their lines of credit. It also allows them to acquire trucks equipped with the latest technology designed to save fuel, reduce emissions and enhance driver productivity.

When it comes to financing trucks, banks can be particularly reluctant since trucks can quickly depreciate in value, especially when they are not specified correctly, Maccio added. Also, since truck loan default rates are higher among owner-operators, bank loan officers tend to lump all truck loan applicants into a higher risk of default category.

“Banks tend to hesitate when it comes to trucks because they don’t know the industry as well as we do,” Maccio said. “Our business is to understand trucks. We work with our customers and Kenworth and Peterbilt engineers to determine the best truck specifications. Our goal is to optimize a truck’s residual value and performance and minimize its operating expenses. Plus, PacLease is part of PACCAR’s financial services segment, which has total assets of $10 billion and an AA- credit rating. So, we’re well capitalized to offer any size company a variety of leasing options. That’s why a full-service lease for trucks through PacLease is so attractive.”

Financing with a Bank is Challenging

Banks and lending institutions have their own set of unique issues that make them hesitant to issue business loans and lines of credit, Maccio added. With so many subprime mortgage loans and mortgage-backed securities still on their balance sheets, banks often must build up significant cash reserves or recapitalize due to write downs of mortgage and commercial loans and still meet federal liquidity standards. According to a Congressional Oversight Panel’s report released in February of 2010, nearly 3,000 small U.S. banks could be forced to reduce their lending due to losses on commercial real estate loans.

“But of greater consequence is a lack of confidence among banks and financial institutions,” Maccio said.

Also, loan default rates are up as more companies find they can’t meet their obligations. As a result, banks and lending institutions must pay much higher premiums for their insurance against financial failures. That makes banks and financial institutions all the more careful with any additional money they have to lend, Maccio added.

Full-Service Leasing Brings Balance to Books

Olen Hunter, Director of Sales-West for PacLease, said before banks and lending institutions make new loans or extend additional lines of credit to businesses, they typically establish certain debt-to-equity ratio requirements. These requirements can help them feel more confident about their customers’ ability to repay their loans.

Any time a company borrows money to buy assets, such as trucks, the company must record the loan on the liability side of its balance sheets as well as the truck(s) on the asset side, Hunter said. That can impact productivity ratios or profitability ratios such as return on investment (ROI), return on assets (ROA) and return on equity (ROE). Some banks may look at a company’s ROA and ROI to determine the interest rate or premium they will charge. Investors and stockholders also look closely at ROAs and ROIs.

&ldqup;Companies that borrow money should be concerned with maintaining best-in-class ROA and ROI ratios,” Hunter said. “If your company has depreciating assets, like trucks for example, and you don’t generate an improved return or profitability for each dollar you invest in those trucks, your financial ratio will be out of order not only for internal reporting, but also for all of your company’s future financial needs.

Creditors and lenders look at ROA and ROI ratios to determine a company’s productivity and profitability. That’s important because most companies have a limited amount of capital they can borrow. If they borrow that capital to acquire trucks, then it can’t be used for projects or opportunities, Hunter said. Full-service leasing allows companies to use their leasing provider’s money to finance the trucks. That leaves companies free to use their borrowing capacity for projects or other revenue-generating endeavors.

“Through full-service leasing, your company can greatly improve its balance sheet by minimizing the number of assets it’s using to produce a certain amount of income or profit,” Hunter added. “So, your company’s balance sheet will look much more favorable.”

Full-service leasing can also reduce the costs of truck ownership. Hunter said many financial decision-makers are often under the misconception that full-service leasing will cost their companies more than buying trucks and taking care of their maintenance themselves.

Full-Service Leasing Often Costs Less Than Ownership

In a lease, the cost of the vehicle, apportioned tax and license, finance charge (set interest rate for the lease term), and calculated cost-per-mile maintenance expenses, minus the calculated residual value, determine your monthly payment.

“Often, companies find that when we do a lease-own analysis in a net present-value, net after-tax format, full-service leasing from PacLease can help them reduce their operating costs after they consider the tax impact that a full-service and off-balance sheet operating lease provides,” Hunter added. “Through our analysis, we can help companies calculate how much owning and maintaining a truck fleet truly costs them down to whatever unit of measurement they need. For beverage distributors, for example, we can calculate the cost down to the per-case level. Then we can show them how the per-case cost of full-service truck leasing with PacLease compares to that of truck ownership.”

Hunter said company owners, finance officers and fleet managers are usually surprised to find that the per-unit cost with full-service leasing is often less than the per-unit cost of owning their trucks and maintaining them.

PacLease Offers Fleets a Customized Approach

“When we sit down with our customers, we ask questions to try to understand what drives their costs and then determine ways we can help them develop efficiencies in their operation through the right truck specification choices,” Hunter added. “For example, we sat down with a fairly large steel distribution company based out of Los Angeles and found that payload was the company’s most important measurement of success. Every pound we could take off the company’s leased truck was another pound of product they could haul to their customers.”

In the past, the company leased trucks from another leasing company that took more of a “one-size-fits-all” approach to their truck specification needs, he said.

As a result of taking measurements of one of the company‘s trucks, we provided the company a Peterbilt 386 with an optimized wheelbase and durable, but lighter weight components,” he added. “The optimized wheelbase and lighter weight components allowed the company to haul more steel and as a result the company made more money with that truck.”

Companies that Lease Trucks Remain in Control

Hunter said there’s another misconception about full-service leasing among companies that own trucks. They often believe that by turning over responsibility of truck maintenance to a leasing company, they somehow will lose control.

“Nothing could be further from the truth,” he said. “Companies that have switched from truck ownership to leasing trucks from us have found that when PacLease maintains their trucks, their operations department can concentrate on their core business, and in many cases, improve on-time delivery rates.”

Hunter said PacLease demonstrates its value to fleets through a unique blend of truck equipment and truck financing expertise.

“When you go to banks for truck loans, the banks are primarily concerned with what’s the likelihood of repayment,” Hunter said. “Banks consider their appetite for those kind of assets and also measure the risk of default. That’s how they determine your finance rate. At PacLease, we also consider the likelihood of repayment, but we also look at maximizing the resale value of the equipment. We help customers steer clear of making truck specification mistakes that will not only lower that resale value, but also be a detriment to their operation.”