The Rental Equipment Industry (Heavy Equipment) is prevalent within the Asset Based Lending market and brings some unique risks and opportunities to lenders. Using an experienced and knowledgeable ABL Examiner is paramount in ensuring that the risks are properly identified and accounted for, in order to maintain a secure and profitable lending relationship.
The equipment utilized within the industry can be vastly different, ranging from smaller equipment including lifts and track loaders, to larger earthmovers, such as bull dozers and excavators. The following list represents best practices for any type of equipment financed:
Tracking Equipment (theft prevention):
Many equipment suppliers are using GPS and/or RFID tracking to maintain locations on equipment or rolling stock, and Examiners need to be mindful of how the equipment is tracked and what systems are in place to prevent theft. The National Equipment Register (NER) is another layer of protection that equipment renters should be using.
The Examiner will want to be assured that all equipment is inspected and maintained before and after every customer usage. Injuries are common within industries that use heavy equipment and the equipment suppliers should take all necessary steps to make sure the equipment is safe before delivery to the customer.
Floor Plan Equipment:
The sale of rental equipment is typically financed via a floor plan arrangement with a specific lender who takes a lien against the equipment until it is fully paid for. It is important for the Bank that is financing to ensure that the equipment is free from all liens. The Bank also needs to safeguard that it has a first position against the equipment. Generally, once a piece of equipment is fully paid for, the floor plan lender will generally issue a lien releaser or subordination agreement on the said serialized equipment. Reviewing lien releases, payoff reports and other documentation is a critical component of the exam depending on the financing arrangement in place.
Lenders must ensure that they hold proper title on all equipment that is rolling stock (Water Trucks, Dump Trucks and other street vehicles) which requires a title registration with the Department of Motor Vehicles. Depending on the volume of rolling stock that the Company maintains in their rental fleet, these types of equipment items could warrant an additional reserve against eligible collateral.
Third party appraisals are a key component in determining the appropriate advance rate to use based on the NOLV (net orderly liquidation value) determined by the appraiser. A lender may want to require quarterly appraisals for closer monitoring of collateral. A review of machine hours, condition, year, make, model and other areas are all important components that play a role in the appraiser’s determination of the NOLV.
Rental Fleet Utilization which essentially calculates the percentage of equipment on rent based on the borrowers total rental fleet is a key ratio for the rental equipment industry. Lenders should typically watch for low utilization rates under 70% as this could indicate a sign that the Borrower’s equipment is not being fully utilized and could signify stale equipment and a low customer demand which could be a potential red flag. Equipment inventory that is physically on hand in a yard and not being rented out by a customer does not generate cash flow for loan repayment. Lenders should require their borrower to provide periodic utilization reports on their rental fleet.
Putting the Pieces Together
The Rental Equipment Financing industry has unique challenges when it comes to properly identifying and analyzing risks to lending facilities. The Examiners at Dopkins & Company have a strong system of knowledge sharing, and our collective decades of experience provides us with the essential skills necessary to serve clients engaged in the complex field of Rental Equipment Financing.
About the Author
Dopkins & Company, LLP
Dopkins & Company, LLP, a locally owned certified public accounting and consulting firm offers comprehensive accounting, auditing and tax services, forensic accounting, as well as IT, wealth management consulting, internal audit support, and collateral examinations to privately held and public companies, not-for-profit organizations, and individuals. For more information, contact firstname.lastname@example.org.