For contractors, construction equipment financing is a key step to securing the equipment needed to keep their businesses running. As Africa continues to experience exponential levels of infrastructure development, many contractors are starting to experience business growth in different parts of the continent; increasing workloads and the need to purchase additional construction equipment.
However, for those looking to finance equipment purchases, the process can often be difficult and confusing. By recognizing the key steps that contractors need adopt, they will be able to navigate the financing process with an arsenal of knowledge.
Ensure you have a good credit history
Credit history is a key factor in the financing process and is often at the root of financing issues. While a history of delinquent payments or judgments would seem like the biggest concerns for a lender, the financing department also takes a hard look at how the contractor managed through the difficult times and the company’s recent performance.
Many lenders look at the handling of lending relationships and how the contractor followed through with the commitments made during the difficult times.
If the contractor can show a history of commitment, even in a difficult situation like a recession, the financial department will be more open to exploring all possible avenues to assist.
Maintain a stable profit margin
The increase in construction activities in Africa has led to an increase in construction companies which look to benefit from the numerous projects around the continent. This has in turn led to high level of competition the industry.
A competitive environment has a tendency to limit the market growth for those in it, leading to weak profit margins. Weak profit margins often worry lenders, because they are not sure that the contractor can ultimately pay the debt owed.
In a competitive market, the bidding process is key. It is important to accurately bid for jobs in these markets, as underbidding to win jobs can quickly damage profitability and cash flow. By keeping a steady flow of diverse work, contractors can show a stable profit margin that will assist in the financing process.
Manage growth and work capital
Unfortunately, fast growth does not always support a future business plan. The balance sheets of many contractors cannot support the development they are attempting to achieve. While previous performance may be good, it is important to show the work in progress that is supporting the ability to repay the incremental debt.
It falls to the management team to have a clear plan, and it is critical to effectively communicate the business plan to lenders. By planning appropriately and showing lenders detailed projections about cash flows, who the contractor is working with and the leadership to manage the growth, this potential issue can be minimized.
Show a level of transparency
The best thing a contractor can do is to be transparent with the lender. Most lenders would like to see two years of financial statements, work in progress and revenue projections. Contractors should be willing to share this information with lenders; after all, the contractor is asking the lender to loan money.
By providing high-quality, complete information, the contractor already proves a level of responsibility and transparency. It also does not hurt to seek a third-party audit. Financial lenders often look at a third-party document differently than one that was internally prepared. By walking into the situation with a level of openness, contractors can help to assist in the financing process.
It is important to be realistic about growth projections. When looking to finance equipment, it is essential to assist in the process by having information readily available and being open with lenders about the business’ needs and future. By heeding this advice during the financing process, contractors can make the process smoother, allowing them to focus on growing their business.
It was very interesting that the financing department takes a hard look at how the contractor managed through the difficult times and the company’s recent performance. In my opinion, this is a good indicator of how the company will react when hard times do arise, because they undoubtedly will. I’ll have to use these tips as I look for a construction equipment financing company.
I’ll make sure that the company has good credit history before we get financed for construction equipment loans so we don’t have problems when we start our project. Once we maintain a stable profit margin, it will be easy for us to get good financing. Since we need to show a level of transparency with the lender, I’ll make sure to tell them what we plan to do so that we get approved for a loan.