As an increasing number of seasoned operators, along with industry newcomers, consider adding higher capacity mini-buses and motorcoaches to expand their transportation offerings, how to get the best financing terms is a different game than buying a typical sedan or SUV.
When financing new motorcoaches, “they’re like a second mortgage,” says Mike Villani, owner and president of Auto One Capital in Melville, N.Y. With more than 20 years in the commercial livery lending business, Villani says smaller operators interested in motorcoaches need financial counseling to look at their options after their initial “sticker shock.” Purchasing a used bus at half the cost is often the prudent strategy to get in the business, he adds.
“We always have a conversation with operators because if they will spend $500,000 on a new bus, we ask them why they think they can make enough money to make it work.
“A newbie doesn’t understand the bus business is different. If you have to pay $5,000 a month, plus the costs of maintenance, which isn’t cheap, plus hire drivers, insurance, etc., can he make $10,000 a month to cover everything and make a profit? We don’t want to see them get into a position where they could possibly lose their company. That’s why we might recommend buying a used bus for half the cost to get them in the game if they know they can earn enough money per month to make it worthwhile.”
Build Equity
Running a successful full-service chauffeured and charter transportation business is all about building equity by closely managing the financing of your fleet, says Stephen Story, owner of James River Transportation, Richmond, Va. Ranked No. 40 in the LCT annual 50 Largest Fleets List (July 2016) with 27 shuttle/mini buses and 34 motorcoaches, Story firmly believes in short-term vehicle financing to build equity in his company.
“We’re aggressive in our terms and never finance over five years,” says Story, whose company has been in business for more than 85 years. “Of course, financing varies because you look at the total cost of owning and operating the vehicle, how much cash you put down, financing rates, and the amount of debt you are comfortable with.”
For example, Story’s baseline financing terms are five years for motorcoaches, two to three years for used motorcoaches, and three years for sedans. “You get better interest rates with shorter terms because you are not financing all of your vehicles at the same time. That builds equity because you own assets and that frees up cash to put into your facilities and operation.”
Financing The Big Picture
Larry Kole, president of Autoline Capital Corp. (Cronton-on-Hudson, N.Y.), says interest rates are slowly creeping up, which obviously translates into higher financing payments.
“We’re seeing small incremental increases in our internal rates and when we get squeezed that translates into higher rates for customers,” Kole says. “I don’t have a crystal ball into the economy, but there are many finance and lease options available that can help payments while maintaining cash flow.”
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New and veteran operators should consult with their accountants to first get a handle on their financial situations and cash flow to make prudent decisions about vehicle financing options, Kole adds. Of course, like all lenders, Kole says the best way to obtain the best financing rates is to make sure you have a good credit score that opens up favorable lines of credit with lenders and banks.
“We always look at risk in lending. For example, I had a guy who was in business three months who wanted to finance a new Escalade and then have it converted to a stretch, at a total cost over $125,000. I asked him how much he could put down and he said $2,000, and I said ‘Well thanks for calling’ because he will never get approved for a loan because he is a bad risk.”
Because Kole and Villani specialize in the livery industry, they understand the nuances and cyclical nature of the business, which helps them craft financial terms that suit operators dealing with market ups and downs, especially for motorcoaches.
“We know there are slow seasons for some operators where we can structure a motorcoach loan that defers payments for a few months until business picks back up again,” Kole says.
“We have a history with people in this industry, so we understand there are good times and not so good times, so we have to look at the overall financial picture of an operator,” Villani says.
Villani points out the last four to five years have been rather strong for the industry, but cautions he has seen some operators struggle a bit in the past six months. “We have to be more selective now and do more due diligence before we make a loan.”
Other factors pressure operator cash flow now, such as more expensive vehicles, costlier electronic repairs, and the increases in insurance rates, Villani says. “This is a relationship business with us, unlike banks that don’t understand the livery industry, so we know all of the factors that affect operators running their businesses.”
Story reiterates managing your fleet financing helps in those up and down periods.
“For example, if we see a dip in the economy, and because we have strong equity and good credit lines with the banks, we can tap into our credit to make payroll and meet other expenses. Or, if we need to add another vehicle to meet a contract obligation, then we know we can finance that vehicle at a good rate.”
Stay Close To Your Lender
Establishing a close relationship with your lender and bank is essential to getting low rates and lines of credit.
“Having a good relationship with your bank makes all the difference in the world,” says Stephen Story, owner of James River Transportation of Richmond, Va. He says he consistently shares his financials with banks to build a solid relationship.
“I’ll share how we are doing every quarter with our banks and give them a narrative on our budget and plans going forwards and how our budget will meet those objectives,” he says. “Communicating with banks when things are going well, or when they are not, establishes trust so we know where we stand for future loans.”
He also emphasizes establishing close ties with financial institutions is important because banking industry contacts change. “People change, but because we have established a consistent upfront relationship, we know they value our business, and we know where we stand with them for future loans.”
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