Financing Big-Ticket Construction Equipment: Funding options help businesses own rather than rent.

• Author: Barbour, Tracy
• Position: FINANCE

Construction is a capital-intensive industry that requires business owners to invest in expensive equipment, machinery, and other assets. Thankfully, there are a number of construction equipment financing options available to make it easier for owners to buy or lease the items they need.

Traditional financial institutions can be a viable funding source for owners who can't afford to purchase outright needed construction equipment. For instance, First National Bank Alaska offers a variety of term financing for equipment purchases. Generally, the bank likes to keep its equipment financing term from one to ten years, according to Zac Hays, vice president of the corporate lending division at First National. Most of its equipment loans are shorter in length, but a ten-year term could be provided for something such as a commercial fishing vessel or other equipment with a very long, useable life.

Typically, the life of the equipment is factored into the loan term. "Often it's wise to tie the term of the loan to the length of time you can depreciate that equipment," Hays says. "Obviously you want something where the loan balance is in tune with the value of the equipment."

Construction equipment is somewhat of a specialized type of asset. So the financing for such an item will have different considerations than standard commercial funding. When underwriting, the bank considers the purpose of the loan and how it can impact the business. "Generally speaking, companies buy equipment because it will help them perform a task, and that task produces cash flow," Hays says.

However, First National looks at every deal on a case-by-case basis, Hays says. Loans are generally collateralized by the equipment--assuming it's something the bank wants and there is enough equity to meet the loan-to-value requirements. For example, First National may not be interested in collateralizing a loan with a very specialized piece of equipment or equipment that would be located somewhere in a very remote area. In that case, there are other options. "We can always use something in addition to or instead of the equipment, such as real estate, cash, and equipment other than the equipment being financed," he says.

Often the business owner is the borrower so the bank considers factors on a "global basis" for underwriting purposes. "We look at the income of the business or borrower on a stand-alone basis to make sure the business/borrower can afford the payment. We also look at the net worth and the credit history of the borrower," says Hays.

The owner would be a guarantor on the loan so personal income, personal net worth, and credit history would also be evaluated as part of the lending process. Of course, if the business is owned by shareholders, then only its corporate information would be assessed.

From a typical interest-rate standpoint, First National employs risk-based pricing for its construction equipment loans, Hays says. It looks at loan-to-value, down payment, years in business, and...