Trucks, trailers or any other commercial vehicles are important business assets required in the normal day-to-day running of your business operations. As a business owner, you are constantly faced with a number of critical decisions, whereby you have to decide – what is best for your business. So, if you are a business owner you should carefully consider a number of important factors when it is time to get a new truck, trailer or any other commercial vehicle, such as having:
1. The right truck that will help to keep your business competitive
2. The right truck for the work required and at the right price
3. The right finance arrangement to buy a truck
Different Types of Truck, Trailer or Commercial Vehicle
Business owners can buy any of the following vehicles:
>> New Truck
>> Refrigerated Lorry
>> Tipper, or
>> Transporter (light or heavy)
Factors to consider before buying New Truck, Trailer or Commercial Vehicle
There are a number of factors you should take time to consider when buying a vehicle, and you should ask yourself the following questions:
>> Is the truck, trailer or commercial vehicle new or used?
>> Is the truck, trailer or commercial vehicle coming from a dealer, auction, or private sale?
>> Has the truck, trailer or commercial vehicle been previously written-off?
>> How many hours has the truck recorded?
>> Is there any money owing on the truck, trailer or commercial vehicle?
>> Are you considering drawing down from your home loan (e.g. equity release) to give you the required cash to buy your truck, trailer or commercial vehicle?
Listed here is a brief summary of the types of finance arrangements available in the market place, and after you have read this article you should find choosing the right finance arrangement to be the simplest decision you will make:
Finance Lease – This financing arrangement enables you (the customer) to have the use of your truck, trailer or any other commercial vehicle and the benefits of ownership, while the financier (lender) retains actual ownership. The finance lease arrangement will also enable you to free-up your capital for other business purposes.
Commercial Hire Purchase – This financing arrangement is where you (the customer) hire the truck, trailer or any other commercial vehicle from the financier (lender). You have the certainty of a fixed interest rate over a set period (I.e. 2 to 5 years) and the flexibility of reduced monthly payments by including a final “balloon” payment at the end of the term.
Asset Loan – This financing arrangement gives you (the customer) the security of knowing that your truck, trailer or any other commercial vehicle is an asset of your business and it offers you the certainty of a fixed interest rate, over the choice of loan terms (I.e. 1 to 5 years).
Seek Expert Advice
I sincerely recommend that you should seek expert advice before choosing any of the truck finance arrangements because, the taxation and accounting treatments you choose may vary from option to option.
If you want to remain in the driver’s seat and concentrate on running your business so that you can cover your costs, overheads and running expenses, then look no further and take advantage of professionally qualified and specialised finance brokers, because:
>> They have a thorough knowledge of the finance and trucking industry
>> They have access to many lenders/credit providers as they deal with them on a regular daily basis
>> They can customise the best truck finance arrangement for you
>> They can get you into a new truck quickly and easily
So, if you don’t want to spend hours of your valuable time trying to find the right truck finance arrangement, then let a specialised and professionally qualified finance broker do the running around for you.
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The right equipment can help your business in becoming more productive and profitable. So, if you want to drive your business forward and you don’t have the available cash flow to invest in equipment, you can obtain finance for it. Business equipment finance can be used for purchasing new and used equipment or vehicles. It will help you in conserving your working capital for other purposes like inventory or operating expenses.
Business equipment finance is ideal for established businesses who want to finance the purchase of:
>> Cars, utilities and light commercial vehicles
>> Trucks and buses
>> Computing and office equipment
>> Printing, medical and manufacturing equipment, or
>> Industrial plant equipment
Choosing the Right Business Equipment Finance Arrangement
Lenders/credit providers offer many types of business equipment finance options. You have to choose the right one in order to run your business smoothly. Here is a list of different types of vehicle and equipment finance arrangements available in the market:
Finance Lease – This financing arrangement allows you to use the equipment or vehicles and also lets you enjoy the benefits of ownership. The lender/credit provider retains actual ownership of the goods.
Commercial Hire Purchase – In this financing arrangement, the lender/credit provider owns the equipment or vehicles during the hiring period (usually two to five years). And, when you pay the final instalment, ownership is automatically transferred to you.
Chattel Mortgage – It is an effective way to finance goods for business use. Under this loan agreement, you will borrow funds to purchase equipment or vehicles (chattel) and you will also take its ownership at the time of purchase. Against these benefits, you will provide the security for the loan to the lender/credit provider by way of a mortgage over the equipment or vehicles.
Equipment Rental – It is an agreement between the lender/credit provider and you whereby the lender/credit provider buys the equipment or vehicles on behalf of you and rents it back to you over a fixed period (two to five years).
Seeking the Right Advice for obtaining the Right Business Equipment Finance
It is vital for your business that you have the right finance structure in place. If you choose the wrong loan package, you may end up hurting the financial stability of your business. To avoid such mistakes, you must consult an expert commercial finance broker. He/she has a thorough knowledge of the credit policies and standard requirements for business equipment finance. So, he/she will be able to provide you the right financial advice. You should also seek help of your accountant in understanding the treatment of depreciation and any tax advantages that may be available to you.
So, this is how you can obtain the much-needed equipment finance for your business.
Best of Luck! Hope you get the right financing deal.
WHAT IS REVENUE-BASED FINANCING?
Revenue-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided by RBF investors to small- to mid-sized businesses in exchange for an agreed-upon percentage of a business’ gross revenues.
The capital provider receives monthly payments until his invested capital is repaid, along with a multiple of that invested capital.
Investment funds that provide this unique form of financing are known as RBF funds.
- The monthly payments are referred to as royalty payments.
- The percentage of revenue paid by the business to the capital provider is referred to as the royalty rate.
- The multiple of invested capital that is paid by the business to the capital provider is referred to as a cap.
Most RBF capital providers seek a 20% to 25% return on their investment.
Let’s use a very simple example: If a business receives $1M from an RBF capital provider, the business is expected to repay $200,000 to $250,000 per year to the capital provider. That amounts to about $17,000 to $21,000 paid per month by the business to the investor.
As such, the capital provider expects to receive the invested capital back within 4 to 5 years.
WHAT IS THE ROYALTY RATE?
Each capital provider determines its own expected royalty rate. In our simple example above, we can work backwards to determine the rate.
Let’s assume that the business produces $5M in gross revenues per year. As indicated above, they received $1M from the capital provider. They are paying $200,000 back to the investor each year.
The royalty rate in this example is $200,000/$5M = 4%
VARIABLE ROYALTY RATE
The royalty payments are proportional to the top line of the business. Everything else being equal, the higher the revenues that the business generates, the higher the monthly royalty payments the business makes to the capital provider.
Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. In a way, the business owners are being punished for their hard work and success in growing the business.
In order to remedy this problem, most royalty financing agreements incorporate a variable royalty rate schedule. In this way, the higher the revenues, the lower the royalty rate applied.
The exact sliding scale schedule is negotiated between the parties involved and clearly outlined in the term sheet and contract.
HOW DOES A BUSINESS EXIT THE REVENUE-BASED FINANCING ARRANGEMENT?
Every business, especially technology businesses, that grow very quickly will eventually outgrow their need for this form of financing.
As the business balance sheet and income statement become stronger, the business will move up the financing ladder and attract the attention of more traditional financing solution providers. The business may become eligible for traditional debt at cheaper interest rates.
As such, every revenue-based financing agreement outlines how a business can buy-down or buy-out the capital provider.
The business owner always has an option to buy down a portion of the royalty agreement. The specific terms for a buy-down option vary for each transaction.
Generally, the capital provider expects to receive a certain specific percentage (or multiple) of its invested capital before the buy-down option can be exercised by the business owner.
The business owner can exercise the option by making a single payment or multiple lump-sum payments to the capital provider. The payment buys down a certain percentage of the royalty agreement. The invested capital and monthly royalty payments will then be reduced by a proportional percentage.
In some cases, the business may decide it wants to buy out and extinguish the entire royalty financing agreement.
This often occurs when the business is being sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become strong enough to access cheaper sources of financing and wants to restructure itself financially.
In this scenario, the business has the option to buy out the entire royalty agreement for a predetermined multiple of the aggregate invested capital. This multiple is commonly referred to as a cap. The specific terms for a buy-out option vary for each transaction.
USE OF FUNDS
There are generally no restrictions on how RBF capital can be used by a business. Unlike in a traditional debt arrangement, there are little to no restrictive debt covenants on how the business can use the funds.
The capital provider allows the business managers to use the funds as they see fit to grow the business.
Many technology businesses use RBF funds to acquire other businesses in order to ramp up their growth. RBF capital providers encourage this form of growth because it increases the revenues that their royalty rate can be applied to.
As the business grows by acquisition, the RBF fund receives higher royalty payments and therefore benefits from the growth. As such, RBF funding can be a great source of acquisition financing for a technology company.
BENEFITS OF REVENUE-BASED FINANCING TO TECHNOLOGY COMPANIES
No assets, No personal guarantees, No traditional debt:
Technology businesses are unique in that they rarely have traditional hard assets like real estate, machinery, or equipment. Technology companies are driven by intellectual capital and intellectual property.
These intangible IP assets are difficult to value. As such, traditional lenders give them little to no value. This makes it extremely difficult for small- to mid-sized technology companies to access traditional financing.
Revenue-based financing does not require a business to collateralize the financing with any assets. No personal guarantees are required of the business owners. In a traditional bank loan, the bank often requires personal guarantees from the owners, and pursues the owners’ personal assets in the event of a default.
RBF capital provider’s interests are aligned with the business owner:
Technology businesses can scale up faster than traditional businesses. As such, revenues can ramp up quickly, which enables the business to pay down the royalty quickly. On the other hand, a poor product brought to market can destroy the business revenues just as quickly.
A traditional creditor such as a bank receives fixed debt payments from a business debtor regardless of whether the business grows or shrinks. During lean times, the business makes the exact same debt payments to the bank.
An RBF capital provider’s interests are aligned with the business owner. If the business revenues decrease, the RBF capital provider receives less money. If the business revenues increase, the capital provider receives more money.
As such, the RBF provider wants the business revenues to grow quickly so it can share in the upside. All parties benefit from the revenue growth in the business.
High Gross Margins:
Most technology businesses generate higher gross margins than traditional businesses. These higher margins make RBF affordable for technology businesses in many different sectors.
RBF funds seek businesses with high margins that can comfortably afford the monthly royalty payments.
No equity, No board seats, No loss of control:
The capital provider shares in the success of the business but does not receive any equity in the business. As such, the cost of capital in an RBF arrangement is cheaper in financial & operational terms than a comparable equity investment.
RBF capital providers have no interest in being involved in the management of the business. The extent of their active involvement is reviewing monthly revenue reports received from the business management team in order to apply the appropriate RBF royalty rate.
A traditional equity investor expects to have a strong voice in how the business is managed. He expects a board seat and some level of control.
A traditional equity investor expects to receive a significantly higher multiple of his invested capital when the business is sold. This is because he takes higher risk as he rarely receives any financial compensation until the business is sold.
Cost of Capital:
The RBF capital provider receives payments each month. It does not need the business to be sold in order to earn a return. This means that the RBF capital provider can afford to accept lower returns. This is why it is cheaper than traditional equity.
On the other hand, RBF is riskier than traditional debt. A bank receives fixed monthly payments regardless of the financials of the business. The RBF capital provider can lose his entire investment if the company fails.
On the balance sheet, RBF sits between a bank loan and equity. As such, RBF is generally more expensive than traditional debt financing, but cheaper than traditional equity.
Funds can be received in 30 to 60 days:
Unlike traditional debt or equity investments, RBF does not require months of due diligence or complex valuations.
As such, the turnaround time between delivering a term sheet for financing to the business owner and the funds disbursed to the business can be as little as 30 to 60 days.
Businesses that need money immediately can benefit from this quick turnaround time.