Ordinarily, Credit allows companies to expand their business, improve efficiency, and diversify their operations so they can take advantage of new business opportunities. But overall demand for business financing has waned as the economy continues to work through a deep recession.
“Consumers aren't buying as much, so many businesses find that they don't have a pressing need for financing,” said Chris Maccio, national sales director for the eastern US and Mexico operations of Paccar Leasing (PacLease). “However, for those companies that must buy replacement vehicles for their aging truck fleets, finding competitive sources of funding remains a significant challenge.”
Many banks have tightened their lending criteria even though the federal government's Troubled Asset Relief Program provided several major US banks hundreds of billions of dollars in an effort to spur more lending. A recent quarterly survey of US bank loan officers conducted by the Federal Reserve found that two-thirds of respondents reported their banks tightened lending to businesses.
“Plus, in these challenging economic times, many companies find they must use existing lines of credit to pay bills or to make payrolls as their customers take longer to pay on their accounts,” Maccio said. “Or they must have access to ready sources of credit that will allow them to take full advantage of new business opportunities quickly if stimulus efforts by governments in North America and around the world boost the global economy.
“Even with good credit ratings, a surprising number of businesses both large and small find that banks scrutinize their requests closely. That's why preservation of their existing credit lines is so critical to their operations.”
As financing remains challenging, Maccio said he is seeing more companies turn to full-service truck leasing as an alternative. Full-service truck leasing like that offered by PacLease allows companies to not draw on their lines of credit, and acquire trucks equipped with the latest technology designed to save fuel, reduce emissions, and enhance driver productivity.
When it comes to financing trucks, banks can be particularly reluctant because trucks can depreciate quickly in value, especially when they are not specified correctly, he noted. Also, truck loan default rates are higher among owner-operators, and bank loan officers tend to lump all truck loan applicants into a higher risk of default category.
“Banks tend to hesitate when it comes to trucks because they don't know the industry as well as we do,” said Maccio. PacLease's business is to understand trucks and determine the best truck specifications in order to optimize a truck's residual value and performance and minimize operating expenses.
Banks and lending institutions have their own set of unique issues that make them hesitant to issue business loans and lines of credit, Maccio added. With so many subprime mortgage loans and mortgage-backed securities still on their balance sheets, banks often must build up significant cash reserves or recapitalize due to write downs of mortgage and commercial loans and still meet federal liquidity standards.
“But of greater consequence is a lack of confidence among banks and financial institutions.”
Also, loan default rates are up as more companies find they can't meet their obligations, he said. As a result, banks and lending institutions must pay much higher premiums for their insurance against financial failures. That makes banks and financial institutions all the more careful with any additional money they have to lend.
Full-service leasing allows companies to use their leasing provider's money to finance the trucks, said Olen Hunter, national sales director for PacLease's western division. That leaves companies free to use their borrowing capacity for projects or other revenue-generating endeavors.
“Through full-service leasing, a company can greatly improve its balance sheet by minimizing the number of assets it's using to produce a certain amount of income or profit,” he said. “So, a company's balance sheet will look much more favorable.”
Many financial decision-makers are often under the misconception that full-service leasing will cost their companies more than buying trucks and taking care of their maintenance themselves, observed Hunter, “but that's not usually the case. With a full-service lease, a company pays for the use of the truck, rather than the truck itself. That can mean a big savings in both time and money over ownership.”
In a lease, the cost of the vehicle, apportioned tax and license, finance charge (set interest rate for the lease term), and calculated cost-per-mile maintenance expenses, minus the calculated residual value, determines the monthly payment.