NEW WHEELS: Proper financing can pay big dividends on your bottom line.
Most people looking for a new truck loan will approach their own bank first. This may be a good tactic but it shouldn’t be your only one.
You owe it to yourself to shop as diligently for a lender as you do for your power unit. Get at least two or three quotes and explore some of the options discussed below. After all, your repayment package will determine the comfort level you have with your new asset and how hard you will have to work to pay for it.
First off, you should have a plan for the truck you’re about to buy – either a contract or a prospective job on the horizon. It is important to estimate how much your equipment will be making year-round. Keep in mind most jobs have peak and slow times and you may want to structure your payments to compensate for the downswings.
Let’s say that the tractor you want to buy costs $150,000. Most dealers will expect a down payment of 15 per cent, in this case $22,500.
Most highway tractors are financed over five years. However, vocational trucks, such as dump trucks, have a longer life expectancy and are often financed over seven years.
At the end of five years your $150,000 tractor will still be worth $25-30,000. So instead of paying the entire thing off by making payments of $2,500 per month (rough figures only), you can adopt a less severe payment schedule of say $2,000 per month, but end up owing $25,000 at the end of the five years. Then you can refinance the remaining amount for a further two years. This is called “ballooning.” A good place to start looking for money is with the manufacturers. All the OEMs have in-house financial services available, including Volvo/Mack, International, Freightliner and Paccar. As well, many of the larger dealerships have their own finance and insurance manager on site.
“Our finance and insurance guy is available to anyone who walks through the door,” says Mark Willey from Peel Mack in Mississauga, Ont. “His first stop is Mack financing, but he’ll look around other places to try to get the best deal for anyone from a first time buyer to a fleet owner.”
Other potential sources are financial institutions that take a keen interest in the transport sector. Firms like Wells Fargo, CIT and GE Capital actively court trucking industry clients but they may set a minimum on the amount that they want to lend.
Loan brokers are another option. They try to pair up trucking businesses with lenders. Some of them have packages specially geared to truck owners. Capital Connect of Mississauga, Ont., only requires 10 per cent down on a new truck.
“We deal a lot with owner/operators. Even if they don’t have the down payment we can arrange some type of financing,” explains Galina Hogeboom, senior manager at Capital Connect. “The important thing is that they have good credit. And owning your own home is a plus.”
Loan brokers can typically arrange terms of prime plus two points to prime plus four, depending on the individual circumstances. On the other hand, if you have great a relationship with your bank you may be able to get a line of credit for as low as prime plus one point or a small business loan at a similar low rate. But banks are entirely different creatures when it comes to trucking. Not all of them are interested in getting involved with owner/operators. Generally speaking, CIBC and Royal Bank are the most “truck friendly” at the current time, but this shifts periodically. A better place to look might be a credit union in your area. Some of them, like Caisse Populaire in Sudbury, Ont., offer aggressive financial strategies available to fledgling owner/ops.
Of course, the bigger the bundle, the better the deal you can carve. For example a medium-sized fleet with a good credit history looking to buy 10 tractors might negotiate a package where the only security is the asset itself. This is called “asset based borrowing” and requires no cash outlay, excluding taxes.
At the end of five years, the company will still have to refinance the $25,000 owing on each tractor, but the lender will be satisfied that the asset is worth that amount. The same fleet may have loans with more than one financial institution. This helps to manage risk and assures competitiveness among the lenders.
“Typically a fleet president will get into a financial dance with a partner trying to buy their money at the best rate, while his operations manager is spec’ing and pricing tractors,” adds Mark Willey of Mack Canada. “We’ve had situations where we’ve written mortgages for busy fleets and offered strategies to set up lines of credit that are not presently available on the market.”