Operations

Credit Market Contracts and Cleans Up Amid Meltdown

Martin Romjue
Posted on November 9, 2009

LAKE SUCCESS, N.Y. — 2009 has brought a severe contraction in credit availability for new fleet vehicles while operators have cut back on vehicle purchases.

Two close observers of the fleet financing market see plenty of vehicle inventory, fewer credit sources overall, and no sign yet of a clear bottom to the market.

"It's really been catastrophic. We've never seen limo business as bad as it is now," said Eric Coolbaugh, a partner in Advantage Funding, one of the leading providers of vehicle financing and leases to the chauffeured transportation market. "Banking people around a year ago are either not there or not lending to businesses. Banks that offered low rates have run for the hills" amid huge losses.

The chauffeured vehicle market has seen a major "acceleration in depreciation," says Don Coolbaugh, vice president of sales at Advantage and brother of Eric. "We have not seen a 2010 vehicle financed or sold in a long time."

In fact, there is plenty of 2009 new and used vehicle inventory, much of it repossessed, Don says. Coachbuilders are not producing vehicles unless they are on order.

The Coolbaugh brothers underscore what has been hardening into a fact of limo life since last year: Unless an operator has sterling credit and financial statements, it is difficult to get financing on either a new or used chauffeured vehicle. Fleet vehicle inventory tracked by Advantage has depreciated about 35% overall during the last six to eight months alone. Vehicles retain little or no equity if sold or re-financed.

"A 2007 limousine that was in the high 40s/low 50s - if you can get a bid in the high 30s, you're doing good," Eric says. The industry now has so much inventory build-up that it has to be cleared out before prices stabilize and the buyer market returns to normal.

Banks hesitate to lend to buyers with non-spotless credit until there is a clear understanding of the marketplace and where it's going in 2010, Eric says.

"Used inventory is selling at depressed prices, meaning that newer vehicles will have to be sold at depressed prices also," Eric says. Since vehicle auctions bring only 20 cents on the dollar, buyers who need product can get aggressive in naming a price, he says. 

Business Advantages

Advantage Funding, a firm that has financed chauffeured vehicles for the industry since 1997, remains on solid ground after a near-two year recession because of its firm backing from Marubeni Motor Holdings, Inc., a Japanese trading company, and steep and steady growth based on sound financial practices.

The company grew about 20% for nine consecutive years, building a clientele through word of mouth and referrals. Despite the recession, its principals say the company remains healthy thanks to savings and reserves. It has grown in the last two and a half years, although not in the chauffeured transportation sector.

Overall, the limousine/livery market, which makes up about 35% of Advantage's portfolio, has fallen off about 50%, when comparing January through September of 2009 with the same period last year. That's beyond the company's initial forecast of a 30-40% decline. The company also is doing about 20% more vehicle re-financings when comparing the same time periods. Despite these trends and the fact that vehicle leasing dropped dramatically in late 2008, Advantage has a manageable delinquency rate.

16 Points to Consider

To help operators navigate the uncertain bottom and tightened credit landscape, the Coolbaugh brothers share the following tips and observations:

  1. Generally, it's better for operators to put more money down on a vehicle and go for shorter term loans and/or leases to maintain equity in the vehicle. That avoids being potentially upside down.
  2. But for those operators with good credit who need cash flow, they can go for longer terms with less money down and apply manufacturer rebates.
  3. There are far fewer financing options now than last fall because many banks have closed, merged, or stopped making vehicle loans.
  4. Pay down any debt as quickly as possible. Minimize liabilities. This is a good plan for anyone in business, not just operators.
  5. Customers can buy new and used chauffeured vehicles at historically low prices.
  6. Stellar credit can get a buyer about a 7% loan rate; challenged credit 11-15%
  7. Lenders are avoiding high residuals on commercial leased vehicles. In the retail vehicle sector, residuals have been significantly lowered.
  8. 2010 will likely bring a market bottom and slight recovery because vehicles have been running too long. Once dire predictions subside, buyers will become more optimistic and start to spend more, and companies will have employees travel more.
  9. Clients with good credit and vehicle equity can save cash by refinancing vehicles to stretch out the payments. These customers also can obtain cash by doing cash out refinances.
  10. There is not much bottom-line difference to a buyer's finances for a commercial vehicle loan versus a lease. Both must meet strict qualification standards in this environment.
  11. A refinancing deal can help an operator lower payments. Eligibility for a refi depends on the age of the vehicle, company cash flow, business performance, and operator profit margins. Buyers should present to a bank the cost of operating the vehicle and how much revenue it is expected to generate.
  12. Keep clear communication with your lenders. If you have any financial hiccups, explain to your lender(s) what is going on. Have a plan to stay or get current if you fall behind.
  13. If you are looking for additional equipment and are current with your payments and everything is in order, find out from lenders what they have for off-lease inventory, such as repossessed or returned vehicle inventory. Banks will be eager to remarket off lease and have less strict credit guidelines to do so.
  14. Financing for mini-buses has not seen the same year-over-year drop-off compared to other chauffeured vehicles, but that's because an increased number of dealers are giving Advantage business, not because more people are buying mini-buses. Advantage has increased market share.
  15. Vehicles overall are getting more use as operators hold onto them longer. At some point, they will need to replace them and sales will increase.
  16. The U.S. economy was leveraged to a point where the point of de-leveraging becomes unknown. Customers don't have the same latitude for refinancing homes and/or tapping equity credit lines. Leverage is coming in the form of credit card balances. All of this lowers consumer discretionary income and as a result hurts the limo industry.

Related Topics: Advantage Funding, credit card compliance, vehicle financing companies, vehicle leasing

Martin Romjue Editor
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