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Lenders invest in greater caution

Finance companies are taking a softly softly approach to what they lend and where their money goes.

How much finance has changed for machinery buyers over the last 12 months is open to debate. With banks disappearing from the market and changes in buying habits for construction machinery, some people are saying there’s been a “seismic shift” in the industry. But with money still available for borrowers, other commentators say it’s business as usual.

Everyone agrees there is a lot more caution in the market and the crazy deals on offer during a construction boom are things of the past. It has taken big lenders such as the Bank of Ireland, Bank of Scotland and Tokyo Leasing to exit the market to make the others take stock of some of the less responsible deals on construction machinery.

VAT-only deposits, 60-month deals and balloon payments at the end of the loan may now have become things of the past, as banks take a much more sober approach to their lending.

Creeping nerves

Steve Moody, director of SKM Asset Finance, handles customers for Takeuchi and Doosan. He says nervousness among lenders toward the construction industry has crept in over the last few months.

“Six or nine months ago, finance companies had unlimited funds,” he says. “Whereas before, if a company wanted to borrow £250,000 they could have gone to one finance company, they might find those companies are restricting what they lend to £100,000.”

Competition among finance firms within the booming construction industry reached such a level that Mr Moody says he is not surprised that some lenders disappeared. “I would find that I would price a deal sensibly and then get a finance company coming in with a charitable interest rate,” he says. “The Bank of Ireland was one of the biggest culprits and they’re not here now. They didn’t have a sustainable system and the structure in place.

“Some of the finance companies just got greedy. People were lending money without credit checking and due diligence. Banks and finance companies have since reviewed their policies.”

The construction boom attracted financiers that were new and unfamiliar with the construction industry and this encouraged yet more erratic practices. Bank-owned companies, for example, kept their eyes on machinery buyers’ balance sheets and not on the construction equipment they were buying. This practice was equivalent to buying a car without even giving its tyres a quick kicking.

“A lot of the bank-owned companies look at the balance sheet and not at the excavator the customer was buying,” says Mr Moody. “Banks were not writing depreciation terms into their plans. They weren’t looking at whether a machine might depreciate quickly over a period of time. They didn’t  know how they’re going to move it on and what their disposal programme would be. It’s taken a few high profile casualties to make companies look at the assets along with the finance.”

And while times were good, some lenders also forgot that construction naturally has its ups and downs. This again led them to make some rash decisions. “We’re financing a sector that can be cyclical,” says Bruce Atkinson, UK and Ireland retail finance manager for CNH, which looks after machinery sales for Case. “It’s only prudent to price for that cycle of risk.”

Now the flamboyance has gone from financing construction machinery, how do things look for machinery buyers and how do they make themselves more attractive to the financers?

Firstly, they have to bear in mind that the banks are a lot more cautious about how they loan. Having seen some of their contemporaries go under after euphoric lending during a boom time, they will now want to spread their bets a lot more. Also, finance companies are looking for better returns on what they lend.

Off the market

“Over the last several months, a number of banks have moved out of the market and those that remain are much tighter in who they lend to,” says Terex Financial Services interim European director Neil Carmichael. “When they are coming back into the market they are doing it at a price and customers can expect to pay bigger deposits and have shorter terms.”

Finance companies face pressures other than just lending to high risk firms, says Mr Atkinson. “We’ve kept our pricing similar all along, so until recently we were considered quite high for the market,” he says. “But the Bank of England base rate hasn’t been passed on to asset financing, so really our rates are similar now to one or two years ago.”

The result, he says, is that buyers would be extremely lucky to get a deal with less than a 10 per cent deposit.

But Bell Equipment European credit representative Owen Bolt says the money to buy equipment is still around, and cash-rich banks are still looking to invest in the construction industry. They are just asking borrowers for a lot more in the way of assurance, he says. “I’ve seen banks come in with hundreds of millions to place in the market,” he says, “but they want to do that with decent credit terms.”

Lenders are much more discerning about good and bad credit, however. Mr Moody explains that they got their fingers burnt in the recent haste to offload cash into the construction industry. “Finance companies have given up the lax practice of just relying on Companies House for results and are digging deeper to get an accurate picture of their trading,” he says. “They are looking closely at current statements and scrutinising whether they are trading up to the limit of their overdraft, for example.”

Getting close and personal

Relationships are everything, says Mr Atkinson, and lenders will favour those companies that they have done good business with in the past. “We’re happy to continue dealing with customers with whom we have long-term relationships,” he says. “With new customers, we’re taking a closer look at them. I think that’s prudent in the current climate.”

New customers could expect to provide their last two sets of accounts and, if the business is less than three years old,  directors may have to provide personal guarantees.

With lenders confining themselves to smaller deals, Mr Moody adds that machinery buyers will have to get to know a broad range of finance companies to get a good deal on their machines. Prudence runs very deep among buyers too at the moment, explains Mr Moody, and they are only committing themselves when absolutely necessary.

“We’ve customers in the plant hire sector that would change their machinery every two or three years, but now they’re delaying that,” he says. “A lot of people at the moment want to buy machines, but they’re nervous that they might not have the work in three to six months time. A lot of people who were previously buying speculatively are now waiting for the contract to come through.”

Of those companies that are buying machinery, Mr Moody says he has also noticed that those who would previously have bought 10 machines, are now cautiously buying three. Despite this hesitancy, he says there is still a lot of interest in new machinery. “There is a pulse,” he says. “If people want to buy machinery, the money is out there and we are relatively busy.”

Finance companies might take a more sober approach to the market, but machinery buyers still have some bargaining power. Terex, for example, is trying to keep machinery buyers interested with “zero rate” deals. “We are picking up the interest rate on behalf of our customers,” says Mr Carmichael. “It lowers the exposure on the deal for the banks or asset finance companies. We’re looking at what we can do to make things more comfortable for them.”

The finance industry has been through a turbulent time over the last year and the outlook for machinery buyers is very much different from the heady days of the construction boom. Some of the reckless lenders have disappeared from the industry, while those that remain are behaving in a much more restrained manner than they may have done when times were better.

However, a downturn in lending does not spell disaster for machinery buyers. Finance firms still have money to invest in construction machinery and companies with good credit, and those that are prepared to do a little more work, are still worthy investments.

The market might have sobered up after the boom time, but for machinery buyers, the party certainly isn’t over.

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