Frigid Financing: Considerations when acquiring a reefer
Posted: September 19, 2019 by Jim Park
TORONTO, Ont. — When it comes to financing reefers, they are just like any piece of equipment. Yes, they obviously cost more than dry vans, but they will usually generate more revenue. But your financing options, interest rate, and payment terms are based on your credit rather than the quality of your relationship with the dealer. You’ve probably heard the term “subject to credit approval?” That’s the fine print in any financing deal. Weak credit always means you’ll pay more. Good credit opens some doors for negotiation.
Lenders look at borrowers as risks to their financial wellbeing. Buyers with really strong credit history represent less of a risk to the lender’s capital, so the interest rate – or the insurance – on the loan can be a little lower. Some lenders may not even require a downpayment when dealing with strong borrowers. As credit becomes weaker, the downstroke usually goes up. Lenders look to protect their money. Moving down into the riskier borrowers, perhaps with a bankruptcy in the past or a poor repayment track record, the rates can turn downright ugly.
For example, one small fleet we spoke with recently is borrowing money at 2% over prime through a major chartered bank. He has been in business for more than 20 years and has a long and very good relationship with his bank. Compare that to the 14% or more some lenders charge risky borrowers.
To the rejected borrower, the system may not seem fair, but that’s the way it works. If the buyer’s record is poor, the downpayment and the interest rate will be higher than for a strong borrower. Once that trailer goes to work, its debt service cost will be higher than that of a stronger fleet. That can put the weaker borrower at a bit of a disadvantage in the market.
“It all depends on your quality of credit,” says George Cobham Jr., vice-president of sales and marketing with Mississauga, Ont.-based Glasvan. “The higher the quality of the credit, the less likely the lender is to ask for a significant downstroke. Typically, if you have weaker credit, they’ll want more money down, anywhere from 10 to 20%.”
Any new buyer should do their research to find out what they can get approval to buy. Can they get approval for two trailers? Five? Even if you’re approved for four or five trailers, maybe the prudent thing is to start by buying a couple. Sometimes it’s best to ease into it. If you get approval for five, start with two and see how it goes. If you have the finance approval waiting for the balance, you can add them when the time is right.
“Buyers need to know where they stand in the market and work on getting credit approval before committing to purchasing the equipment,” says Cobham.
The leasing option
Rather than tie up capital in an outright purchase, several rental and leasing options exist that can provide fleets with some flexibility. On an open-ended trailer rental, for example, fleets can manage peaks in business or experiment with different pieces of equipment for different customers. Young fleets and fleets that are expanding and branching out into new service areas can ease the pain of learning those markets by renting trailers rather than taking on long-term commitments.
“Instead of investing in a prolonged purchase or finance agreement, fleets can come to us just for a short term, rent and experiment with that business model to see if it’s profitable or something they want to do,” says Dale Scoles, national credit manager at Trailer Wizards. “That level of financing is very appealing to a large number of businesses out there, large and small.”
There are actually three different types of trailer leases out there. What’s commonly referred to as a rental, is called a true lease. Then there’s an operating lease, which is a fixed-term non-purchase lease. And then there’s the finance lease. Each one has its own merits and many fleets use combinations of all these options.
An operating lease offers the fleet the benefit of a fixed payment over the term of the lease and usually includes service and maintenance of the asset. There can be certain tax advantages to this sort of a lease, which are best left to the discretion of the fleet’s accountant or financial advisers.
“The fees charged for such arrangements just become an expense, and it’s literally just a throughput on your business accounting module,” says Scoles.
The final type, the finance lease, is where at the end of the term fleets have the option of buying it out. Under these arrangements, fleets can negotiate maintenance and service plans, but most do not.
“Typically fleets do not opt for maintenance plans,” says Stan Chan, Trailer Wizards’ chief financial officer. “Most prefer to go lean on it because they want to keep their financial commitment to a minimum. They want to treat it like a loan with the lowest-possible payments and perform their own maintenance on the equipment.”
Not everyone qualifies
All the talk so far assumes the buyer is qualified to take on the debt or financial obligation, but that’s not always so. Buyers might be turned down for any of three main reasons: horrible credit, high debt-to-service ratio, or misrepresentation on the credit application.
There are people out there who for whatever reason haven’t been able to maintain their current or recent obligations. Most individuals in such a situation are aware of their standing and shouldn’t be surprised when they are rejected. Many lenders will tolerate “bad” credit, but the borrower will sometimes pay extraordinarily high interest rates or face substantial downpayment demands.
A high debt-to-service ratio, or DSR, can be a problem, too. Scoles says a lot of businesses, especially small to medium-sized businesses, carry a lot of debt and then can struggle with cash flow. “The DSR is a simple, mathematical calculation between debt expenses and income and revenue, and it breaks down to a percentage. The smaller that number gets, the higher the risk until you get to a certain point when you know asset lending becomes too high a risk for some lenders.”
Inaccurate, vague or generalized information in a credit application can sink you, too. It’s one thing to report that you have 12 trucks in the fleet, but it won’t work out in your favor if a lender discovers two of those trucks are sitting on the back of the lot without engines. “Clear, straightforward and accurate information is what lenders are looking for,” says Scoles. “Making sure that your financials are true and correct really helps, too. Unfortunately, when we see information like that coming in, it weighs heavily in our risk evaluation.”
If you’re seeking financing for a reefer trailer, do a lot of research into the financial options, not just the equipment options.
What do you need? How much will it cost?
Credit approval notwithstanding, buying a reefer trailer is much more complicated than a dry van. There are tons of options to consider, and each will add cost, but might save you money over the life of the trailer. Should you go long and spec’ a 10-year trailer or minimize the spec’ to keep the upfront cost down?
Phil Langevin, president of P.A. Langevin Transport based in Carleton Place, Ont. takes the long view. He spec’s his trailers to last 10 years or more and they operate between Quebec and western Canada, where the trailers take a real beating. The company specializes in fresh, frozen and dry commodities. He spec’s multi-temp reefer units, stainless steel bodies, disc brakes and crossmembers on eight-inch centers, for example.
“Those trailers cost almost as much as a tractor now,” he says, “But they will outlive my trucks. In my lanes, a cheaper, less-durable trailer just won’t last.”
Obviously, going long has financial implications, but Langevin recommends buying the best trailer your financing will allow.
Russ Polack of Ocean Trailers in Delta, B.C. has been spec’ing and selling trailers for 28 years, so he knows a thing or two about what works and what doesn’t. He says many buyers don’t really know what they need when they are starting out or taking on new business. He suggests some serious discussion about spec’ing the trailer for the job, and then a financial evaluation to see if the buyer’s expectations match their financial wherewithal.
“I often suggest a rental unit in the short-term to see if it’s the right trailer for the job,” says Polack. “It’s easier to fix mistakes before you commit to owning the trailer.”
In order to get the customer into the right reefer trailer, the dealer needs to know what the buyer has planned for the unit.
“Even if you’re planning to keep the trailer for a shorter three- to five-year period, there are always good reasons to buy the best equipment: reliability, warranty, for example,” says Glasvan’s vice-president of sales and marketing, George Cobham Jr. “But even the shortest horizon can mean that you should buy the best equipment you can afford because you can get smoked on resale.”