Pub. 11 2021 Issue 2

22 www.azbankers.org How Alternative Financing Expands Opportunities For Banks And Their Customers M ANY BUSINESSES THAT HAVE struggled through the past year will be pursuing opportunities to expand their markets and increase productivity through equipment upgrades and additions in products and services. The post-pandemic market will open new avenues of growth for many businesses and those banks positioned to grow with their customers. Some of these business owners, however, may be unable to meet regulated bank underwriting criteria and consequently may fall through the cracks of the traditional equipment financing formula. While traditional loans may be declined, alternative debt sources can provide a solution to help the bank and their business customers achieve a positive outcome together. Over the course of 20+ years in the finance industry, Equipment Leasing Services (ELS) has found alternative finance solutions that often provide banks with new paths for customer success, especially in regard to deal structure, credit, size and collateral, as exemplified by real commercial banking opportunities ELS has financed over the past year. Structure Providing alternative financing structures allows regional banks without a dedicated equipment division to offer an array of products that larger banks and their competition already have at their disposal. For instance, the structure tends to be very important in the transportation industry, and one of the better lease structures available is called a Terminal Rent Adjustment Clause (TRAC) lease agreement to document and fund the acquisitions of commercial vehicles for over-the-road and local use. TRAC lease agreements provide a means to obtain the asset for the lowest possible monthly cost. It reduces the sales tax obligation while establishing a fixed residual and avoiding additional mileage charges. Using a TRAC lease structure, ELS helped a bank customer in the freight hauling business acquire a new truck worth $150,000 for the lowest monthly cost compared to a conventional loan. Here is an example: Loan: $150,000 Conventional Loan: $150,000 TRAC Lease: $150,000 Term: 48 Months Rate: 5% Conventional Monthly Payment: $3,454.39 TRAC Monthly Payment: $2,888.52 TRAC Residual: $30,000 By using a TRAC lease structure, the bank’s customer saved $565.87 a month, which improved their overall debt coverage ratio. It also helped alleviate the upfront costs of sales tax and down payment that the conventional loan required. Instead of putting an immediate cash strain on the business, the lease financed 100% of the equipment costs while spreading the sales tax obligation over the term. This type of structure and documentation is not typical of bank offerings for loans, but it is something that is done regularly in many industries. In these examples, the referring bank can fund the overall request needed, or ELS can provide funding from its sources. Credit Underwriting criteria for banks include the overall credit quality of a customer. Credit quality may be a tough challenge for new businesses or existing struggling businesses looking for additional equipment upgrades to meet the demand for opportunities such as new contracts or expansion into new markets. It’s important for banks to be able to respond quickly to these customers and their needs and requires the bank to look for ways to meet their customer’s needs while staying within their overall credit requirements. Between PPP loans and the uncertainty and challenges that COVID-19 has weighed on business, the past year has been a strange time. An example of this came when ELS was brought in to help supply financing for a customer in the food manufacturing and packaging business. The business had been successful for many years, but it was struggling early in 2020 when the pandemic caused a sudden revenue drop. The bank had already provided a loan to the customer earlier that year and could not increase its exposure due to the company’s losses. When the customer needed financing for manufacturing equipment to keep up with the demands of a large new contract, ELS assisted in providing the capital necessary. The company received $550K of equipment funds needed to capitalize and grow one of its most profitable contracts. Size There are times when a bank client has just become too large: either the client has gone beyond the bank’s ability to service a loan request, or the bank has been presented with a small loan that is not cost-effective for a bank to underwrite. It is in exactly these types of situations that alternative financing becomes a useful tool. ELS having its own capital and funding resources proved useful when a partner bank had a great business relationship with a By Equipment Leasing Services