This is the third part of a five part series on used equipment. Click here to see other parts of the series. Click here to download the full version of the Used Equipment Report.
Now that you have chosen that used excavator or wheel loader to add to your fleet, the next step in determining how to finance it.
With dealerships selling their rental machines, leases that end and trades coming in, there’s a lot of supply of high-quality, newer equipment on the market, according to lenders. They also indicate that there is a lot of credit available to help close these deals.
However, borrowing money to buy used construction equipment may take some research to find the deal that best meets your needs. Lenders say that just looking for the lowest interest rate may not make the most financial sense in the long run.
“It’s not like financing a new car or a used car,” says John Crum, senior vice president at Wells Fargo Equipment Finance. “There are so many factors that go into buying or financing used construction equipment. “
One of the first things lenders will want to know is the age of the equipment you are purchasing, what condition it is in, and who it was in before you.
Because the equipment does not have a registered title like cars and trucks, buying used machinery can take a lot of homework to ensure that there is a clear title on the machine and no privileges. against her. This is especially true in contractor-to-contractor sales and where equipment has changed hands several times over the years. The lender will want to see all deeds of sale or proof of ownership from the original sale.
“It can get complicated, time consuming, and expensive to do if you do multiple privilege searches,” says Crum. “It can be a long and frustrating process for both buyer and seller.”
One way to avoid such a lengthy search is to buy from a franchise dealer, he says. Dealers have usually done the title work already.
In addition to determining the machine’s pedigree, lenders will want to research its value. Be prepared to find that the price you pay may not equal the value of the lender’s loan.
Lenders usually look at what similar machines bring in on the average auction or resale. With this dollar figure determined, they can then decide how much money they are willing to lend.
But that’s only part of the picture of the loan. The other pieces of the loan puzzle focus on the borrower.
There is an application for that
Most lenders, whether banks or OEMs, will ask you to complete a loan application. And in many cases, if you have good credit and buy a newer model of low hour machine, that’s all they’ll need.
They will research your credit history and credit references, then structure the loan terms based on that information and the value of the machine.
The process becomes a bit more complicated for older machines or if the borrower has credit problems.
Then the lender can request the financial statements from previous years. They can also request to see your company’s work history, documentation of current projects, and any contracts for future work.
According to lenders, the main reason for refusing a loan is a bad repayment history. But many lenders are willing to look for ways to overcome credit barriers. This is especially true for the financial services divisions of large OEMs. A big part of their mission is to help their dealers serve customers.
“This means that we approve a high percentage of transactions that come to us because we try to fulfill this mission, while managing the risk associated with loans,” said Dave Gilmore, senior vice president of global marketing. and sales for John Deere Financial. “We will be looking for a way to say yes to the deal through different loan structures that match the client’s repayment capabilities. “
Now that the equipment and your credit have been considered, it is time to structure the terms of the financing.
Questions such as how long will it take you to pay off the loan, how much will it cost you to borrow money, and how much money will you need to put into play. This can be the part of it. the most complicated – and costly – of the deal and where lenders say it’s important not just to look at interest rates.
“Policymakers often want to focus on rates,” says Mike Rankin, vice president of financial services for construction equipment at Volvo Financial Services. “But you really need to consider prepayment charges, fees, loan terms, and the flexibility of the lender to work with you.”
The usual financing for used equipment is a fixed rate loan of 24 to 48 months. Some lenders also offer terms of up to 60 months on late model rental equipment purchases.
Interest rates on used equipment tend to vary from 1 to 5%. Some manufacturers offer zero-interest loans for trade-in sales and lease returns from their dealers. They also offer warranties and maintenance offers as incentives on certain used equipment.
Lenders say loans usually come with down payments, but some loans do not. Down payments typically range from 10 to 20 percent. The down payment amount often depends on the borrower’s credit history and the value of the machine.
Those with less than stellar credit may have to make concessions to obtain financing. This might require speeding up loan repayments to gain equity more quickly. They might also have to agree to a shorter repayment term and provide more collateral or a larger down payment.
The warranty is usually the purchased equipment itself. Other guarantees may also be offered, such as real estate, but real estate will require attorney fees, which can be costly.
Those who want to avoid a down payment can consider renting. This option usually only makes sense for newer machines from a rental fleet. Customers can rent the equipment for the duration of a project or as long as they need it. Lenders say, however, that loans remain the most common financing for used equipment.
Another concern of borrowers: what happens if the economy turns south?
Some lenders say they will help borrowers refinance when faced with tough economic times, and also take into account that used equipment is often an entry-level purchase for start-ups.
“We understand the ups and downs of the construction industry and are looking for a way to get approval, even if they have a somewhat chaotic history,” says Rich Fikis, president of Komatsu Finance. “We often help in cyclical times to keep them as a long-term customer. “
Lenders say that over the past five years, they have seen a steady increase in borrowing for used equipment.
They attribute it to the economic health of their customers and to a large supply of recent equipment for sale.
“Now is a good time for customers to look at used equipment because there is a good supply of it,” says Rankin of Volvo Financial Services. “It’s usually late model stuff, with low to moderate hours. In terms of price, they can get pretty attractive payouts and prices.
And with the bigger offer, many lenders are looking for your business.
“It’s extremely competitive,” adds Rankin. “There are a lot of lenders suing the business. “