Pain At The Financial Pump

Equipment lease financing offers an alternative to traditional bank loans.

By James Phelps

Keeping ahead of the curve in the petroleum industry is a daily challenge. At the rate regulations, new technology and consumer-demand change, upgrading your facility can be an incredibly costly proposition. Couple that with rising costs for raw materials—steel, concrete, transportation and energy—and you can have a real financial problem on your hands. Now, more than ever before, understanding your financing options has become critical to ensuring your ability to keep pace with the changing business environment while managing your bottom line.

When it comes to financing an upgrade, the bank isn't your only option. Lease financing is more cost-effective in the long run and less cumbersome than a bank loan. Before going further, let's take a look at some of the details about securing an equipment loan through a bank.

Bank Loans
Suppose you need $250,000 to replace your pumps, canopy and other equipment. First, most banks won't view these things as quality collateral. Because of that, they may require that you relinquish first position on your property and secure it by a mortgage. Next, they'll ask for what could be a substantial down payment, probably adding on points and other fees such as underwriting, filing, appraisals, etc.

With these concessions, the bank may offer you a quarter of a point off the current prime interest lending rate. Such a deal, right? When combining the down payment with loan fees, you could be looking at upfront costs of more than six figures. And borrowing against prime is a gamble anyway, as it's a byproduct of the other fluctuating costs mentioned earlier as well as the economy.

Looking at it another way, you're giving away the appreciation of your assets (typically real estate) in return for assets that will only decline in value (tanks and pumps). If you need to shop for or go through multiple loan applications, each one of those will result in a credit inquiry, leading to a reduction in your credit score. When working with a reputable leasing company, you'll often be provided an idea of what your payments will be before a credit inquiry is made. It's strongly recommended that you only deal with leasing companies that will give you an estimate of payment without requiring you to make a formal application.

Lease Financing
Lease financing, also known as capital leasing, is essentially a loan but doesn't come with the entanglements of bank financing. It's important to know the differences so you can make an informed decision about how you handle upgrading your site(s).

When financing an equipment lease, you'll have far more flexibility while also retaining control of your assets. Lessors make credit decisions based on cash flow and your ability to pay, versus collateral and security, enabling you to remain in first position on your properties. Lease financing allows you to secure a fixed rate of interest and is much faster than securing a traditional loan because a bank isn't involved in the transaction.

With lease financing, you're not financing the equipment, the leasing company is. In some cases, if your credit rating is good enough, the leasing company may finance a portion of the installation. If the equipment becomes obsolete, the lessor bears the risk, so it's easier and less costly to upgrade.

Weigh the Options
As you plan your next project or facility upgrade, look at all of your options. The bank isn't the only financial resource available to you.

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The PEI Journal • Fourth Quarter 2008 • Volume 2, No. 4 • Contents are Copyright © Data Key Communications, Inc.
All rights reserved. • Nothing may be reproduced in whole or part without written permission of the publisher.