Financing the machinery sector

Financing, leasing or renting ? which option suits your business best?

ANALYSIS, PMV, Financing, Leasing, Renting

Financing, leasing or renting – which option suits your business best? PMV Middle East talked with some of the large suppliers of equipment finance to understand how finance packages can allow your fleet to grow and boost your business

Active market
Mubadala GE Capital provides custom finance packages in the equipment sector, focusing on fitting the term with the useful life of the asset says Ivor Dorkin

A fully-licensed bank, Mubadala GE Capital joined the market in 2009. A joint venture between Mubadala Development Company and General Electric, its main focus is SMEs and equipment financing.

Equipment includes construction and logistics, as well as medical and manufacturing machinery, Mubadala GE Capital works with all the leading distributors of logistics and construction in the UAE, says Ivor Dorkin, managing director of SME & Equipment Finance.

Additionally, in a lot of instances the company has direct relationships with manufacturers through its shareholders, primarily on the GE side. It also has its own direct sales team.

In the construction equipment market they target medium and larger contractors, rather than the smaller owner-operators. Financing can be provided on purchases ranging in size from several hundred thousand dollars, up to multi-million dollar deals.

One of the main goals of the company is to make financing of the equipment more aligned with the useful life of the asset, says Dorkin.

“You shouldn’t finance a truck that is going to last eight years over six months. We’re trying to align for customers the useful life of the asset with the period that they pay for it.

“What we saw was that a lot of customers were using short term funding to pay for long term assets. That can cause a massive cashflow imbalance in the business, where they’ve paid for the asset, and used up all their cash.”

This can especially be the case for companies working on longer projects, and owners may be forced to put their own money into the business or take on extra loans.

“The more appropriate response is to put proper equipment financing in place that looks at the underlying contract, the useful life of the asset, and structures the financing to meet that,” says Dorkin.

“That’s our goal, to understand the customer, understand what they need the machine for, where it will be used, and then put a payment profile in place that can support that.”

Terms can be as much as three-five years for expensive items such as cranes. Funding can also be offered for second hand purchases of equipment.

For companies that have spent too much up-front, Dorkin says that GE can offer refinancing packages.

“For strong customers where they have this mismatch that causes a liquidity issue, we are willing to go into their business and refinance their assets – take the short term funding they have against the fleet, and refinance that over a longer period.”

Since companies can at times be faced with slowed-down payments on contracts, Dorkin says it’s important to plan for this possibility and structure finance plans to provide ‘cushion’. “When we look at a deal, we are always looking at the forecast cashflow of a business against their total debt service.

“Any problems that a customer may be having will be magnified if the financing is wrong, and they’ve been financed over a term that is too short, or have been loaned too much.”

While in many international markets funded leasing deals may be more popular, in the UAE customers will own the machine, with the bank holding a commercial mortgage over it. Customers need to own the equipment in part because some work sites, such as in the oil and gas sector, only permit equipment to be used on sites owned by companies complying with certain standards.

“Fortunately, the mortgage infrastructure and regulations here in the UAE are robust. As a funder we are very comfortable that a mortgage gives us a strong collateral position on the asset,” says Dorkin.

For machines that are registered for road usage, the bank’s mortgage will be registered on the mulkiyah, and can’t be released without its consent.

“We know that no one has funded the asset already, and that there is no prior lien on the asset, and it cannot be sold without our knowledge, and you can’t take the asset out of the country if there is a mortgage registered against it, so that’s really good for us.”

Theft is also largely not a worry, says Dorkin, as it’s very difficult to sell the asset without the mulkiyah.

“Unless you’re very sophisticated, and you’re going to break up the asset into spare parts and take them out of the country, the chances of that happening are less likely. The system in place protects lenders and the dealers.”

For assets that aren’t registered for roads, it can be more complex. Customers can opt to register large machines such as crawler cranes that won’t be travelling on the roads, and the authorities will accept it.

For items that cannot be registered, these can be leased. The bank can also arrange finance for non-registerable assets with a commercial mortgage, in which the interest is registered over an asset or list of assets.

It’s an option only considered for large transactions since it involves a considerable legal process, including gazetting of the deal.

Dorkin says they’ve had repeat transactions with around 80% of their customers, and once they’ve gained knowledge of a business it’s easier and quicker to approve subsequent deals.

“We make a point of calling on all our customers, and when you’re doing repeat business with a customer, you do get an insight into their business.

“That’s our goal – to start a relation that then we can grow. As they expand and get more contracts they need more equipment. We want to be their partner as they do that.”

Captive Finance
Caterpillar Financial Services has an interest in seeing its customers succeed, says Greg Simons

As the largest seller of construction and mining equipment in the world, it’s no surprise that Caterpillar has a captive finance arm to aid its buyers.

Based in Dubai, Caterpillar Financial Services (Dubai) Limited operates as a wholly-owned subsidiary of Caterpillar Financial Services Corporation.

Formed six years ago, the company works with Cat dealer Mohamed Abdulrahman Al-Bahar in most of Al-Bahar’s markets.

Headed up by Greg Simons, Caterpillar Financial Services offers a range of financing options for buyers of Caterpillar machinery, both new and used, when bought through the dealer.

“In terms of industry, the Middle East is one of the most diverse regions in the world. Here, Al Bahar, supported by Cat Financial, provides solutions to the construction, quarry, energy and marine industries.”

Leasing, while not common in the Middle East, is also an option, and Simons says that some production-oriented customers are becoming aware of the potential benefits of that arrangement.

As a financing company that has full knowledge of the Caterpillar product, including resale values, they are able to be more flexible, and attentive to their customers’ needs, explains Simons, with confidence in the value of the product they are financing.

“Globally, on average, we are able to approve roughly 30% more transactions than a bank would,” he said.

“Our credit process is quick and streamlined because we understand that any amount of time our customer is without the necessary equipment is lost time and revenue.”

As a captive finance company, they also have a strong interest in seeing their customers succeed. “We want to see our customers stay in business, that way they can continue buying machines and parts from the dealership.”

They will aim to provide finance for any product a dealer sells, whether it’s a large registerable machine such as a wheel loader, or smaller items such as a generator or hydraulic attachment.

Originally when they first entered the market five years ago they focused on larger transactions, but now cover all purchases, and this year the company has started providing financing for forklifts.

One option for purchasing of items such as work tools can be to bundle them into the purchase of a larger item such as an excavator, over which an equipment mortgage will be held.

Cat Financial is a secured lender, and cannot lend money without holding a mortgage on the asset it is financing.

As far as security goes, Simons says that Cat machines tend to do very well in the second-hand market, which makes the financing of new machines easier.

“In the rare occasion when a machine is repossessed from the customer, we work with the Caterpillar dealer as the redistribution path,” he said.

Flexibility is key when it comes to financing, and knowledge of customers’ businesses can help Cat Financial tailor packages.

“The stronger the company’s credit, and the longer it has been in business, the more we’re willing to do. Especially if it’s a customer which we have a previous pay-history with, that helps significantly.”

Work-on-hand is also important when it comes to financing,” explains Simons.

“We don’t just look at the past but we also want to see what projects they have on hand to determine the best structure for the customer.

“At times, customers have cash constraints and their balance sheet may not look the greatest, but they may have a profitable project in place and we feel they have the ability to succeed so we will partner with them.

“And when you are financing a customer, it truly is a partnership and a belief in that organization

“As a customer’s needs change over time, Cat Financial is prepared to offer solutions that change and grow with the customer, no matter what the economic cycle.”

 

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