Better Financing Ahead in 2013

Small and mid-sized construction firms looking to replace aging equipment or buy new equipment to help them grow are in line to get a significant boost from a financing environment likely to continue to improve throughout 2013. This time last year, many lenders were still working through the fallout caused by the bursting of the credit bubble, the economy was barely growing, and loans were more difficult to obtain as a result.

What a difference a year makes. During the past 12 months, a number of factors slid into place to not only expand credit availability for the sector but improve credit terms as well.

A Construction-Driven Recovery

For starters, the continued increase in housing demand marked a steady improvement in construction activity. New home sales increased year over year – a big reason why construction spending increased seven straight months last year before a brief lull in November. That renewed demand is giving lenders more confidence to extend financing as construction firms look to replace equipment they have been sitting on since before the housing and commercial construction meltdown which occurred during the Great Recession.

The pickup in construction activity we are seeing isn’t limited to the residential sector, either. Energy services firms are benefiting from continued expansion in the shale gas market and increased interest in both land-based and offshore deep water drilling as oil prices rise. The “reshoring” of U.S. manufacturing is prompting many companies to expand their production capacity. Despite uncertainty around the looming debt ceiling debate, public infrastructure projects are moving forward in just about every state. And Hurricane Sandy’s devastating arrival in the northeastern US late last year is certain to cause a rebuilding in much of the region.

At the same time, interest rates continued their recent flat to stable downward trajectory. The Federal Reserve has since recommitted to keeping rates low for the next few years, the central bank assigned numeric targets for both inflation and the unemployment rate, and the Fed’s latest economic projections don’t show the economy reaching those levels until at least 2015. So construction firms can possibly expect at least another two years of near-record-low borrowing costs as they finance new equipment.

Increasing Competition

Competition among equipment finance companies has ratcheted up in recent months, which is leading to better terms on new loans and leases. Banks are sitting on a wealth of deposits and are looking for new lending platforms to earn a return on them. Meanwhile, so-called “captive lenders” – or finance companies owned by equipment manufacturers – need to keep their business moving to continue to achieve volume targets.

The problem is those lenders are repeatedly being told by the bigger construction companies that they have enough cash to satisfy their growing demand for new equipment. Corporations hoarded record amounts of cash during the downturn and now some are beginning to put it to work, rather than take advantage of new financing opportunities.

Those competing forces are pressuring lenders who traditionally haven’t serviced small and mid-sized companies to begin courting their business.  As a result, they are much more willing to be flexible on the structure of financing, extending terms on loans and residuals on leases. In other cases, they are more apt to tailor repayment schedules to the purchasing company’s cash flows or other payment constraints.

What to Look For

If you’re an operating officer or a fleet manager, all of this means you may get better terms on the financing you take out this year. But there’s a lot more to look for in a lender than just the one-time cost to your company.

Lenders who specialize in equipment financing and leasing can put money to work faster because they typically lend it against a single asset or a pool of assets, meaning much less documentation is required and companies can get to closing quicker.  By comparison, renegotiating a senior loan facility can take months as the current loan terms are recast, amendments are added to the original loan agreement, and a bevy of documents are refiled. And, as any CFO knows, these delays in securing equipment can possibly mean all the difference between winning and losing a project.

It’s also important to partner with a lender who is constantly on the lookout for innovative financing solutions to support your growth needs. One way an experienced partner can support a growing construction firm is by helping them tap hidden sources of liquidity within its existing asset base. For instance, equipment often retains more market value than is left on the loan as it ages; in some cases, companies in good financial standing can obtain a secured loan against that equipment’s fair market value, giving them access to expand their business.

Rather than think of each financing decision in isolation, it’s critical that a small to midsized construction firm take the long view by building a lending relationship that will give it the financial flexibility to seize opportunities when they arise in the future. With ample evidence that those opportunities will only increase in the coming year, there couldn’t be a better time to start that conversation.

Vince Belcastro is managing director and group head of CIT Capital Equipment Finance, where he is responsible for overseeing financing activities for large ticket equipment leasing and lending, as well as project finance-related activities. For more information, visit

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