New rules for equipment finance

“It is no secret that financiers are a little more difficult to get along with at this point in time,” he said. “Where they were once very keen on significant market share and large volumes [of work], the cycle has changed to see them chasing quality business at the right margin.“Transactions which were perhaps marginal in the past but were still approved, will not get through today. What that means for the customer is that when they are out there looking to obtain funding, they absolutely have to go about it the right way.“That means being very detailed about what they want, giving valid reasons for their acquisition, and providing the necessary financial, industry and business information to support their application.”O’Donoghue said civil contractors were no different to other industries when it came to the credit crisis fallout.“They are in the same boat as every other business at the moment,” he said. “They have heard of the meltdown in the markets and they are a little unsure of the road ahead. “They cannot see around the next bend and, if they could, they would probably be a bit more relaxed.”O’Donoghue said it was important to stay calm.“I strongly advocate an intelligent business-as-usual approach,” he said. “Do not put yourself out on a limb by over-committing financially, but, by the same token, do not take a head-in-the-sand view.“If you need to upgrade your plant because there are some good economies of scale right now and worthy cost savings around that, then take the opportunity to get a march on your competitors. “Be aware of your market and the opportunities you have, and maintain an intelligent but not timid view.”Thompson agreed with O’Donoghue that attention to detail was now more important. “The most valuable thing contractors can do for themselves at this point in time is to get more granular about the way they run their businesses,” she said. “That means monitoring and really understanding all the things that make their business tick and anticipating any issues.“The more detail they have when they talk to us about a new application or refinancing, the more confident and comfortable we are going to be that they are in control.”What is not within anyone’s control, however, is the value of the Australian dollar. The currency has continued a sharp and steady decline since the crisis took hold in September and has had a marked effect on the ticket price of imported construction equipment.Thompson said contractors could reduce their risk by hedging – an expensive but ultimately safer strategy than going it alone.“Hedging is basically about insuring yourself today against future fluctuations in currency and therefore in the price of the equipment you have on order,” she said.“For example, if you want to order an item in US dollars, you can pay a premium to lock in the exchange rate today even though that item may not be ready for delivery for a few months.“It is not a cheap option but it takes away the risk. “You really need to ensure the cost of your equipment is significant enough to make the investment worthwhile.“Additionally, you should look at historical trends to consider how much the AUD might swing and how your business is best positioned to manage that swing.“If you cannot manage the perceived risks, it is far safer to pay to remove that risk altogether.”The strategy has gained popularity as the realities of the credit crisis have hit home.“When we started to introduce hedging as a concept earlier this year, the construction industry was a little slow to take it up,” Thompson said. “The AUD had started to drop but businesses still had confidence that it would bounce back and that they could manage in the interim.“There has been a huge about-face since then – in this [economic] environment, the goal is to remove as much risk as you can.“Hedging is certainly something we would recommend for clients sourcing expensive pieces from overseas manufacturers. The lead time on imports can be quite long and it is impossible to predict what might happen to exchange rates between now and then. And it is always better to be safe than sorry.”While Finlease also offers clients a hedging strategy, O’Donoghue doubts its value at this point in the economic cycle.“Back in June or July, it would have been an absolutely phenomenal opportunity to hedge in at US97c,” he said.“But to do it now when the AUD is around US65c … it is almost a case of the horse having already bolted.”If the timing is right but hedging is too risky, an operating lease might just be the solution. Operating leases are generally short-term arrangements that allow contractors to access equipment for a fraction of the asset’s useful life.Lease payments are fixed and typically much lower than loan repayments, and unlike loans, there is often little or no down payment required at the outset.Thompson said operating leases were becoming more popular. “They can be structured over a term that matches the contract that you need that piece of equipment for,” she said. “At the end of that term, if the equipment is no longer needed, you simply give it back to the financier and walk away.“An operating lease can be costly but it removes the risk of having excess equipment on hand in an environment where contracts are drying up and long-term work is getting harder to find.”

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