Funding hard assets in the equipment hire market
Whatever the sector – from plant hire to broadcast and AV equipment, to more specialist business assets such as brewery plant or temporary road barriers – you can hire the operating machinery and equipment rather than buy it.
One consistent issue for the hire organisations is access to working capital to fund acquisitions or Capex to replace obsolescent equipment and remain competitive.
New equipment
New equipment purchases typically fall into two categories:
- To replace assets that are now unreliable or at end-of-life; or
- Upgrading to the latest generation equipment.
Our experience shows that the process of budgeting and purchasing varies by sector and organisation, but one theme is consistent, most companies require debt to fund the process.
Funding
There are typically 2 types of hard asset funding available:
- Lease and hire purchase, – it being the most common and easily accessible; and
- Asset-based lending (ABL) – a flexible term loan providing a revolving debt facility.
Either route can fund the acquisition of new or used equipment however, for a refinance of multiple used assets lenders will require a valuation of the asset pool allocated between owned and financed.
Asset pool
A consistent challenge for many hire companies is to reconcile and combine operational records with financial records and be able to provide merged accurate information by asset . With this asset information the pool of owned (not financed) assets can be identified and funded; without this asset information, it is unlikely that funding will available.
Valuation and loan to value
A valuation of the owned asset pool can then be performed for prospective lenders reflecting the market value. Material issues will include OEM discount levels, FX fluctuation, age, condition and maintenance regimes, regulation and asset liquidity.
The level of funding will typically be based upon a loan-to-value ratio, which will vary dependent upon lender credit and risk criteria.
Key risk and performance indicators
To support the valuation, prospective lenders will also be interested to learn how the hire fleet is managed. Key risk and performance indicators that define and measure the performance of a hire company include asset location & customer, utilisation and cross hire, length of hire periods and total life ROI.
Advisors, brokers and lenders
A comprehensive asset appraisal report identifying the asset pool, the market value of the owned assets and business KPIs will provide the information required by a prospective lender to issue a term sheet.
A valuation report will also support bespoke lending considerations such as seasonal payment structures, aligning contract terms with asset lives and balloon payments.
Hickman Shearer role
Hickman Shearer provides capital asset valuation, management and sale services across all main sectors and industries. We have deep knowledge and expertise in the equipment rental sector in:
- Reconciling multiple information sources to provide an accurate asset pool of owned assets for funding:
- Comprehensive databases and information sources to provide robust market values of assets; and
- Analysis to interrogate systems to build key KPIs for lenders and future rental company operations.
Hickman Shearer has provided valuation advice to equipment rental organisations for lending in multiple sectors and jurisdictions.
Contact: Tim Chapman, Director at Hickman Shearer.