The Numbers Game: Finance Company Boom Sees Activity Up 30%

Posted on August 1, 2004 by LCT Staff - Also by this author

Many leading companies in the limousine industry have reported seeing between 30 percent and 100 percent more applications year after year, both from established operators looking to expand their fleets and from start-ups entering the business.

The trend began as early as January for some finance companies, while others have said the increase started in the spring.

“Instead of three applications a day, we’re getting five to seven,” says Donna Brady, vice president of Titus Leasing in Camp Hill, Pa.

“Things started breaking loose [in January], after two tough years. We have never done as many deals as we’re doing right now, even prior to 9/11,” she says.

While Advantage Funding of New York in Long Island City has not seen a dramatic increase in the number of applications it receives, its president, Ed Kaye, notes that 20 percent more applications are being approved.

“Our approval criteria hasn’t changed, it just seems like we’re getting more qualified applicants,” Kaye says. “After the shakeout of the past couple years, the companies that were left standing are strong ones.”

Larry Kole, president of Autoline Capital in Melville, N.Y., agrees that the criteria has not and probably will not change for approving applications anytime soon. If anything, he says things may become more difficult as rates continue to climb.

“We try not to pass on the increases to our customers,” says Kole, whose company has seen an influx of 30 percent more applications since March. “But that means we have to be more careful with each account.”

If operators can substantiate the need for funding and have a proven track record of paying bills on time, they have a good chance of getting funding, Kole says.

Interest rates have risen across the board by about a point between March and June, according to Barry Korn, president of Barrett Capital Group in New Rochelle, N.Y.

And the rates at leasing companies are directly affected by the cost of funds that they get from their banks.

The average lease rate is about 11.5 percent [as of mid-June], says Dan Dyson, senior vice president of Brenner Leasing in Harrisburg, Penn. Rates are ranging from 10 percent to 17 percent, depending on the operator’s credit rating.

Dyson warns that leasing companies aren’t required to disclose their APR on commercial leases. So what seems like a super low rate may actually be an add-on rate, which is the amount charged on top of the base rate.

The only way to find out the actual rate is by doing calculations on a finance or interest rate calculator, which may be found at www.interestratecalculator.com. Dyson also invites operators with questions to call him at 717-238-5820.

“It seems like more money is available now that the economy has improved,” Korn notes. “But the lending companies that are still around today are the ones that never changed their criteria for approving applications. You have to do what makes sense, or you end up getting hurt.”

Play By the Numbers, When Choosing Financing Terms

Operators often try to finance their vehicles for the longest allowable time to lower payments, but lenders with industry experience recommend the opposite. In a typical lease, an operator begins to build equity in his vehicle at just beyond the half-way point, says Barry Korn of Barrett Capital Group in New Rochelle, N.Y.

Therefore, in a five-year lease an operator is three years in before starting to cover costs, and that’s if you’re going to use the $1 purchase option, says Korn. If the lease ends with the operator owing 10 percent, the point at which he begins to build equity would be even later.

“In the early part of owning a vehicle, not much generally goes wrong, and what does is usually covered under warranty,” Korn explains.

“It’s after the first few years that the warranty ends and things start to break down. That’s how you get hurt. If you try to get rid of the vehicle at that point, you will be upside-down,” meaning you owe more than it’s worth.

A disciplined operator may be able to stash away profits from the early years to pay for problems down the road, but this is unlikely.

According to Korn, if a $70,000 limo was leased or financed for five years, down to $1, the payoff after three years would be just under 50 percent of the original cost, or approximately $33,000.

Mileage, condition, time of year, and whether it was sold for retail or wholesale pricing all affect whether the operator is upside down.

If the same limousine is financed over five years, down to a $7,000 balloon or a 10 percent payment at the end, the exposure after three years would increase by 5 percent to $37,000. This $4,000 increase – from $33,000 to $37,000 – makes it more likely the operator would be upside down.

After four years, the payoff would drop to about $18,000 for the $1 purchase option, or down to about $23,000, with a 10 percent balloon payment due. Korn recommends keeping the term to four years, down to a $1 payment, so after three years, the exposure is only about $21,000.

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