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Bus and Motor Coach Library

Professional Management Series, #1- Finance

Author – Lee Steinberg (2005)

Most business experts would agree that a fully-fledged business finance plan is the most important element in the long term success of any new, or for that matter any on-going business venture.  This is particularly true in organizations that require a relatively large capital outlay, such in the purchase of new bus equipment.  A sound financial strategy will enable a business to capitalize on new opportunities as they arise, and weather the inevitable business downturns that occur in the marketplace.  A strong financial position is simply a sound and sensible part of any business plan; one that allows an organization to "stay the course" in difficult times by avoiding the pitfalls of having to make short term crisis decisions at the expense of long term success.

Navigating your way through the often complex process of acquiring financing for your business can be a daunting challenge. Learning what steps you should take to maximize your opportunities to acquire the optimum financing for your operation is imperative to the long term success of your business.

We look at the various factors that will influence the granting of credit to your organization. The first item a lender will review is the application.  Lenders ask for the information on a formal application because they feel that the information requested will provide a very good indication as to whether an organization is in a sufficiently viable position to support the added debt.
- The application should be filled out completely.  Do not assume the information requested is not important. 
- Use the full legal name of the company, exactly as it is registered. 
- List the actual physical address for the company.  This will used for overnight packages, meetings, confirmation with state filings, etc. 
- Accurate ownership information must be included.  This information will be checked with the appropriate state.
- Complete bank reference, including an individual contact if available.
- Credit references from your current equipment lenders or lessors.  Always include account numbers and contact information.
- Accountant contact information can be supplied if appropriate.
- Sign the application.  This authorizes the finance company to check your credit.

All of this information should agree with Dunn & Bradstreet (D&B) and state filings.  Any known discrepancies should be explained at the time of application. The lenders biggest concern is that the cash flow is sufficient to support the increased debt structure.  If a lender is not comfortable with a borrower's cash position or with the borrower's insufficient cash flow they will not finance the proposed equipment.

Some lenders expect cash flow statements, others will review bank statement activity and still others will review cash balances.  But in every case they will be looking at your cash levels.  By not keeping adequate bank balances and reserves (so that you can pay your bills even in the event of short term slow down) the company will be denying itself access to credit.

Managing cash flow is vital for growing businesses, or when new opportunities appear. With smaller, privately held companies as you most commonly find in the bus industry, cash flow is the overriding determining factor. The more liquid a company is, the better positioned it is to compete. A cash liquid company can respond rapidly to an increase in business.  They can give a lender incentive to finance the proposed equipment by taking on a sufficient part of the risk i.e. more down payment.  And they can survive a down turn more easily. If there is excess cash the next question the business owner needs to ask himself is what they could do with that excess cash. A modest expansion may be in the cards or maybe taking on that next project in order to achieve that next level of growth. Don't wait until you're choking to be reviewing your cash flow requirements.

Payment history is critical in the granting of credit.  As mentioned previously in the application discussion it is very important to supply complete and accurate equipment debt history.  Lenders want to know how you have handled your obligations in the past.  If you have never been late or are late on an isolated basis or are late every month the individual evaluating your credit will assume you will pay them the same way.  The last bill you want to be late on is the equipment financing one.  With a weak or poor pay history you might very well eliminate your current lender from future consideration and significantly limit yourself to fewer other companies (this can also mean higher payments), or none at all.

Personal credit is also very important because again the credit analyst will be making the assumption that the company will reflect its owner in how bills are handled.  In addition, most lenders will expect a personal guarantee from the owner(s).  Beginning September 1, 2005 everyone in the United States can obtain copies of their credit report for free (currently those living in the West and Midwest can obtain free credit reports).  The three nationwide consumer reporting companies have set up one central website, toll-free telephone number, and mailing address through which you can order your free annual report.

To order, click on www.annualcreditreport.com, call 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can print the form from www.ftc.gov/credit. Do not contact the three nationwide consumer reporting companies individually. They are only providing free annual credit reports through www.annualcreditreport.com, 877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order from only one or two. The law allows you to order one free copy from each of the nationwide consumer reporting companies every 12 months.

By pulling your credit report regularly you make sure the information is accurate, complete, and up-to-date before you apply for a loan for a major purchase like a bus, house or a car. Pulling your report will also help to guard against identity theft. That's when someone uses your personal information - like your name, your Social Security number, or your credit card number - to commit fraud. Identity thieves may use your information to open a new credit card account in your name. Then, when they don't pay the bills, the delinquent account is reported on your credit report. Inaccurate information like that could affect your ability to get business or personal credit, or insurance.
Your company may also have a D&B rating which can influence the granting of credit.  Many of the issues mentioned for credit reports apply to the D&B reports as well.  D&B can be contacted at 866-314-6335 or at www.dnb.com.

Financial statements are another key area for the evaluation of credit.  Financial statements can include a balance sheet, income statement, statement of retained earnings and statement of cash flow.  Internally generated financial statements are a good source of information for the managers of the company as well as for the credit analyst.

If a lender requires financial statements for the credit evaluation they may ask for 2-3 years of historical data.  These may include tax returns, the previously mentioned internal financial statements or accountant prepared financial statements.  Tax returns are used by many companies as their financial statements as well.  The major issue with this approach is that a financial statement generated for tax purposes may look somewhat different than one generated to assist in the management of a company.  Tax depreciation is usually much more aggressive as an example.  A tax oriented financial statement will most likely be prepared to minimize income in order to minimize tax.  This approach may not tell an accurate story of the company's financial situation.  Some credit analysts will understand a particular industry well enough to sort through this issue, however, many will not and the company is putting themselves in a negative position by not having adequately prepared financial statements.

Accountant prepared financials are prepared in different levels.  They also will often reflect book values instead of tax and therefore portray a more accurate view of the company. Compiled financial statements are financials prepared by a Certified Public Accountant (CPA) with information supplied by the company and are a representation of the company's management.  The CPA firm does not audit or review the information and does not express an opinion.

Audited and reviewed statements prepared by a CPA firm can be used in place of tax returns with many lenders.  These statements will effectively tell the financial story of a company and will have been independently reviewed by the CPA firm.  Maintenance of satisfactory accounting records in accordance with generally accepted accounting principles allow the lender to easily read and interpret these records so as to ascertain the financial health of the borrower.

In addition to these externally prepared financial statements a company should be preparing internal statements.  These, interim financial statements, can be used for management purposes as well as in presentations to lenders for the periods the external statements are not yet available.  Internal statements are not going to carry the weight of externally prepared ones however if done well they can be great help in the credit review process.  In fact, some lenders will not consider a loan if interim financials are not available. Speak to your accountant about software solutions they would recommend.
Timely filing of income tax returns is very important.  As discussed in the previous section tax returns are used by many companies as their financial statements and are requested by the finance companies on a regular basis.  When the returns are not available the company may not be able to obtain financing because they do not have current financial information available. 

A good explanation for the reason the equipment is being acquired is very important.  Is the equipment going to replace older equipment that is costing too much to maintain, no longer meets the company's customer's requirements, or is part of regular replacement cycle.  If maintenance is the case then a summary of the costs that will be saved by acquiring the equipment should be presented.  This can include your hard costs, actual material and labor, as well as the cost of downtime, which may include outsourcing work or losing contracts. A presentation of the company's fleet, including make, model and year can help address the other issues.

New contracts that result in the need to add equipment should be presented also.  A brief summary of the financial benefits of the contract can be very helpful to the credit analyst reviewing the request.
General explanations such as, if the company had the vehicle they would do more business are not effective unless they include objective information as to the new revenue sources.  A weak explanation vs. none may actually hurt the request as it indicates the company has not properly analyzed the proposed acquisition.
Financing structures have changed considerably over the last few years.  It should come as no surprise that banks and other lending institutions are in business to make money. The first rule in making money is to not lose it in the first place. Therefore, banks place great emphasis on reducing risk or compensating for risk with collateral and restrictive provisions on the borrower. Be prepared for up front money requirements (down payment, advance payments) to be 10-20% of the acquisition cost.  This can be made up of actual cash or equity in a trade in.  The higher down payments reduce the risk the finance company incurs if a vehicle is returned early in the contract when a substantial amount of depreciation occurs.  The higher down payments also commits the customer to the equipment as it is less likely they will walk away from a substantial down payment vs. if they only paid advance lease or loan payments.

In addition today's terms are shorter and/or have lower back end balloons or residuals.  The faster payback and lower residuals at the end also reduce a lenders risk as the loan is being paid off faster.  The issue for the operator is that these factors put more pressure on a company's cash flow.  The positive side of this is that if a customer wants to dispose of equipment during the term of the contract, either through trade in or sale, they are more likely to be in positive equity position vs. "being under water".

It is also possible that the finance company will not finance additional equipment but only replacement as they do not have enough evidence that the company has the resources or projected new business to support the additional equipment.  The stipulation that a company trade in or sell an existing vehicle is not unusual.

As mentioned earlier financing terms in recent years have been trending to shorter period terms.  But don't necessarily wait for the finance company to tell you what terms they would approve.  Determine the shortest term you can afford.  This can help in your approval as your request may be for shorter term than would normally be granted thus eliminating some of the risk for the lender.  This can also give the company more flexibility when it comes time to upgrade their equipment since equity is being built up a faster rate.  Just be careful not to put too great a strain on your cash flow.

When planning an acquisition consider for how long the proposed equipment will be operated.  If the company is planning on keeping the equipment for three years then it makes sense to request a three year term.  This may or may not include a residual at the end depending on what the estimated value of the equipment is at the end of the contract and determination of the cash flow requirements of the company.  Also early termination of contracts may result in a prepayment penalty.  Prepayment penalties can be substantial so it is very important to try to match the expected life of the equipment to the terms of the lease or loan.

If your business is seasonal and subject to very slow times when making a loan or lease payment would be extremely difficult, skip or reduced payments may be the answer during that slow period.  Many lenders, who have a more intimate understanding of the bus industry, may be willing to build skip payments into their programs.  They would prefer to do this than have a customer constantly delinquent.  It not only helps them keep their accounts receivable current but helps the customer maintain a solid pay history.  This history will be very important when applying for credit in the future whether it with that lender or another.  It also helps to improve cash flow and eliminate the stress of not being able to make a payment and dealing with the collection calls. Reduced payments can take the form of interest only payments or a payment that the operator feels comfortable in making.  It is important to remember that the objective here is to keep a solid payment history.

Hopefully this discussion will help operators in assessing and preparing for their next equipment acquisition.  Lenders and lessors want to make deals, this is the way they make money.  It is important to know what goes into the process and take the necessary steps to facilitate the credit review process.
By offering a lender or lessor a complete picture of a company's financial health and a positive forecast for the future an operator will have gone a long way toward helping get the approval they are looking for.    

As a 20-year veteran of the transportation industry, Mr. Lee Steinberg brings to the table a broad base of experience in general management, finance, and operations.  Lee spent 16 years with the marketing and distribution division of the largest motor coach supplier in North America as Controller and subsequently holding Vice President Controller, Vice President Operations and Regional Vice President positions.  As Regional Vice President and General Manager of the second largest distributor of motor coaches, he directed the sale of new and pre-owned coaches and managed the company's nationwide remanufacturing operation.