Oakmont Capital Services offers financing options for just about every commercial capital need.
Here are just some of the financing structures available to our customers:
Loans are defined as an agreement between a lender and a borrower in which the lender advances funds to the borrower and the borrower agrees to repay the advance over an agreed period of time and with interest. In order to reduce the risk to the lender, the lender takes a security interest on the collateral being financed or on other assets owned by the borrower.
A loan agreement will typically provide for an early payoff by the borrower. The payoff provision will generally allow for a discount to be realized on the remaining interest due.
The easiest way to determine if a finance contract is a loan or a lease is to look at the name of the owner/purchaser on the Bill of Sale or on the lien filing. If the borrower is listed as the owner, the type of financing is most likely a loan. If a bank or finance company is listed, than the contract is most likely a lease.
For tax purposes, any collateral that is financed with a loan is depreciated by the owner/borrower.
Term Loan/Conditional Sales Contract – This type of financing is a fixed rate contract that is secured with the collateral being financed. The purchaser/borrower does not completely own the equipment until the contract is paid in full and the lien is released. A Term Loan is generally fully amortizing. However, the lender and borrower may agree to a balloon payment at the end of the term.
Equipment Finance Agreement – This contract, more commonly referred to as an EFA, is a finance contract that bridges the gap of a lease and loan. The contract works as loan and is generally a fixed rate, fully amortizing agreement. The borrower is considered the owner of the equipment and the lender collateralizes the loan with a lien on the asset(s) being financed. This type of contract was created to permit leasing companies the ability to offer a more traditional loan product. Some of the language in an EFA contract is similar to that of a lease so that the lender can adhere to lending regulations.
Leases are basically a long term rental agreement. The lessee agrees to take possession of the equipment and make scheduled payments to the lessor. The lease payment includes a portion allocated to the depreciation of the equipment during the lease term as well as an amount that is the time value of money or the cost of funds. Therefore, a lease does not have an interest rate, but instead the lease payment is calculated using a lease factor.
A Lease Agreement in non-cancellable, meaning that the lessee is obligated to make the payments for the entire term. Therefore, should a lessee wish to pay their lease early, they would not receive a discount. Additionally, since the lessee is the user of the equipment, they are required to carry both property and liability insurance at levels agreeable to the lessor.
Nominal Purchase Option/Capital Lease – A nominal purchase option lease is typically recognized by its buy-out provision. At the end of the lease term, the lessee may purchase the equipment for a nominal amount, usually $1.00 to $101.00. For tax purposes, this type of contract is considered a conditional sales contract.
Finance Lease – A finance lease typically has a predetermined residual value that is low enough to be attractive for the lessee to purchase the equipment at the end of the term. This purchase option is typically 10% of the original equipment cost. For tax purposes, the lessee can treat this lease as a conditional finance contract providing that the lease term is as long as the equipment’s useful life.
Fair Market Value Lease – A Fair Market Value lease is also known as an FMV lease. This type of lease has an end of term buy out provision that states that the lessee may purchase the equipment for the fair market value as valued at the end of the lease. The lessor assumes the risk of the valuation and charges a factor commensurate with that risk. The lessor is the owner of the collateral and is entitled to depreciate the equipment. The lessee treats the payment as an expense and the collateral does not appear on the lessee’s balance sheet.
First Amendment Lease - This type of lease allows the lessee to exercise a purchase option (usually for the FMV) at a pre-determined period during the lease term. If the amendment is not exercised, the lease renews.
TRAC Lease – A TRAC lease is a Terminal Rental Adjustment Clause lease agreement. This type of lease contract is almost exclusively used for titled equipment. For this type of lease contract, the lessee agrees to a predetermined residual value. If the actual residual value is less than the agreed to amount, the lessee must pay the difference. If the residual value is higher than the predetermined amount, then the lessee is entitled to a portion of the difference.
Other Types of Financing
Inventory Finance – Also known as floor plan financing, this type of financing is used to finance inventory (typically equipment) for dealers. This financing is similar to a line of credit and allows a dealer to purchase inventory and not make payments on that expenditure for a period of time. During this “free period”, the dealer can sell the equipment at their cost. If the “free period” expires prior to the inventory being sold, the dealer will be required to make interest and/or principle payments until they sell the equipment or the equipment is fully paid for.
SBA 7(a) Loan – This type of loan can be used to purchase equipment, commercial real estate or for business acquisitions and working capital. The loan term is determined by the purpose of the loan. The interest rate is floating and is tied to the Prime Rate. The Loan to Value rate of a 7(a) loan is typically 90%.
A 7(a) loan is issued through an approved bank lender. The underwriting process is typically a little more rigorous than a conventional loan due to the guaranty that the lender receives from the United States Small Business Administration. Because of this guaranty, the lender can be more aggressive on the loans that they wish to approve.
Export Finance – Oakmont Capital Services offers various types of financing for transaction outside the United States. To see if we can help, please contact us and we will quickly evaluate whether we can meet your needs.
Portfolio Purchases – If your business finances equipment for short or long terms and you desire to limit your risk or re-capitalize your investment, we would like the opportunity to purchase that portfolio. Please contact us to discuss.
Five Questions to Ask When Financing Equipment
- What is my APR – Do not ask what is my “rate” because the word “rate” is too generic. Some finance and leasing companies use a complicated formula to determine the cost of funds. Often times this “rate” sounds reasonable (like 5.9%). However, the actual APR is significantly higher. And don’t just ask for the APR, take the amount being financed and the APR that the representative provides and verify the APR with an online payment calculator, you can use the mortgage or auto payment calculator on www.bankrate.com or just about any other online payment calculator.
Are there any upfront costs? – Some financing companies require a good faith deposit or commitment fee prior to or just after the approval process. Collecting a fee prior to the borrower receiving the finance documents is unethical or in some states, illegal. Collecting a fee for financing of $300,000+ is more acceptable as there may be more credit due diligence required.
In addition to commitment fees or doc fees paid up front, there may also be closing costs (especially if you are dealing with bank financing). Many banks will charge a 1-point (or more) closing fee. Since this fee is not amortized as part of the loan, it does not affect the APR. However, it does affect the total cost to you. Every point that is collected has an effective cost of nearly 50 basis points or a ½ point increase in your APR.
The last type of upfront cost is the documentation fee. Finance companies charge a doc fee to help them offset the cost of credit pulls, UCC/Titling filing fees, wire transfer charges, inspection and appraisal fees and overnight package delivery. Doc fees generally range from as low as $150 to as high as $750. A doc fee should be collected when you are signing the finance contracts and not before.
- What is the pre-payment policy? – The standard pre-payment policy in the equipment finance industry is commonly called 5-4-3-2-1. This assumes a 5 year term and discounts the remaining stream of payments when an early payoff is requested. The calculation is quite simple, in the first year of a 5 year note, the payoff is the remaining principle balance at the time of the payoff plus 5%. In year two, the payoff is calculated as the remaining principle balance at the time of payoff plus 4%, year three is 3%, Year four, 2% and year five is 1%. Shorter and longer terms have a similar payoff calculation. For instance a 36 month loan may have a payoff calculation of 5-3-1. Many finance and leasing companies do not discount their pre-payments. Instead they quote the remaining stream of payments. This is a key question as the prepayment policy also applies to insurance losses.
- Send me the terms in writing (or email) – This question is a no brainer. The finance terms should be clearly communicated to the borrower. If the Credit Department has approved the finance request, than all of the terms will be known by the representative. If they are unwilling to put the terms in writing, do not do business with that company. Note that a proposal does not reflect the actual approved terms. Proposals are okay before the credit process takes place. However, once the financing has been approved, a term sheet is the only way to convey the terms and conditions.
- How is the financing being secured – When you finance a piece of equipment or other asset, the lender will file a lien on just that collateral. This requires that the equipment be worth the amount of the loan or less. Some bank and finance companies do not just secure the equipment being financed. Instead they file a blanket lien on the borrower. A blanket lien secures all of the assets owned by the borrower. This includes bank accounts, account receivables and equity in other assets including real estate and equipment. A blanket lien allows a bank or finance company to provide a lower interest rate because they have more than 100% collateral value. The downside of a blanket lien filing is that the borrower does not really own anything of their assets lien free. If they want to sell an asset, they need to get the lenders permission.