Mark Meloy:
Hello, I'm Mark Meloy, CEO of First Business Bank. Welcome to the First Business Bank podcast. Today we're talking about why businesses should use equipment financing. We're going to introduce you to how First Business Bank helps business owners solve the dilemma of how to both acquire capital equipment efficiently and for businesses on the sales side, how to sell capital equipment, if that's the normal course of business that they operate. In today's conversation we'll touch on both as we go over the basics and spend the bulk of our time today talking about the financing considerations when acquiring capital equipment.
Mark Meloy:
In a future podcast, we'll discuss how vendors and dealers can use equipment financing to sell more equipment. And First Business Bank has a solution for that. I'm joined by two experts from First Business Bank who will offer some thoughtful insight regarding equipment finance. I'll have each of them introduce their self before we get our conversation started, David, I'll start with you.
David Sook:
Thanks Mark. My name is David Sook. I'm Senior Vice President of First Business Bank's Equipment Finance team and I manage the sales side our group.
Stu Goddard:
Good morning, thank you Mark. My name is Stuart Goddard, I am Managing Director of First Business Equipment Finance group. My primary responsibility is to oversee credit and operations and support the sales team to execute our mission.
Mark Meloy:
Thanks. David, I'll direct the first question to you, between you and Stu, you have over 40 years of experience in equipment finance. Talk about what equipment finance encompasses at First Business Bank.
David Sook:
Sure. First Business Bank approaches equipment finance in two different aspects. We look at both providing financing to our end user clients, as well as providing a solution through our vendor platform to provide financing to our customers and users.
Mark Meloy:
Stu, I'll direct this next question to you. Why would business leaders consider equipment financing options that go beyond sort of the traditional commercial loan?
Stu Goddard:
Good question, Mark. And the answer is oftentimes convenience by offering financing at the point of sale through the distributor or manufacturer. Many borrowers find it just that much easier to obtain credit, cost-effective credit, through our programs, for instance, much more rapidly and without the cumbersome financial package that their bank may require. They may have exposure issues with their current bank; their bank may not offer equipment financing. So oftentimes it's convenient. Starts with convenience and may then also entail certain tax treatment that they want for the debt, whether it's a lease or traditional loan, so on and so forth. But there's a variety of reasons why business owners should seriously consider equipment financing of itself as opposed to more traditional bank lending.
Mark Meloy:
Is there any other things that should be considered? Is it more advantageous to work with a third party different than your existing bank or a captive, which is sometimes the manufacturer provides, is there any realm that's better or worse?
Stu Goddard:
I think a business owner would be well-served to partner with a financial organization that has subject matter expertise. They know their industry, they know the equipment. That's why we tend to work within a certain number of specific markets because we have that expertise and we want to help our borrowers and make the best borrowing decision that they can for their balance sheet, their tax implications, and the overall picture. So yes, they should, absolutely. Instead of just calling 18 different banks to get the very best rate they can get, they're going to find here at First Business very competitive pricing but the expertise that's going to help them make the right decision. And oftentimes they don't even know some of the questions that they need to be asking. For instance, in the used tractor trailer segment, how many miles are on the trailer? What kind of condition is it in? Was it ever overhauled? So on, so forth. These are kind of common consideration questions that some business owners in the rush of their day to day simply forget, or don't think to ask.
David Sook:
One of the advantages that we bring to the table and one of the differentiators between what we do, versus traditional bank lending, is sort of what Stu intimated towards, is we take a customized approach. We have industry experts, we can sit down with business owners, understand their business, look at healthcare for example. There's a myriad of challenges in the healthcare industry and understanding regulatory environments, understanding what their cashflow is. If you're submitting claims to the government or insurance, there's a delay in that. Or if you're in the construction or agriculture industry, you may have seasonality to your business.
David Sook:
What we do is we can sit down, we can have those conversations, understand your business and come back with a solution that would best fit your needs. Not only from a cashflow standpoint, but when you also look at from the specific assets that you're looking at financing, is their obsolescence issue with the equipment that you're looking to finance. And oftentimes when you think about equipment finance, you think about technological obsolescence. And while that is certainly an issue, there's also obsolescence issues relative to a functional or operational obsolescence. Maybe you acquire a piece of equipment today and two or three years down the road, either you acquire or you're acquired by another company and your business changes, the equipment can be fine, but it doesn't have an application. So sitting down with business owners, understanding where their business is today, where they're looking at taking that over the next three to five years is really a fruitful conversation.
Stu Goddard:
One additional point I wanted to jump in and add, that expertise applies not just to the sales cycle, but also the credit and underwriting. There are nuances to lending in different market segments that do help when you partner with somebody who knows those marketplaces, hospital lending is a bit different than lending to a machine shop, for instance, the experience and knowledge of those industries helps considerably.
Mark Meloy:
You guys mentioned kind of tying in the idea of convenience as you started out, Stu, and then the technical part of it. To me, it seems like those two things kind of really marry up to each other, right? When you say convenience, but you might only think about is speed of process, right?. Which is important and it's critically important, but convenience also in the aspects that were just talked about, as it relates to knowing what you're doing, knowing what the considerations should be for that buyer, the types of obsolescence to be considered, and the expertise that comes with a provider that is repeatedly operating in that circle or in that industry.
David Sook:
Absolutely, because it's not a one size fits all. We'll have conversations with customers and talk about elaborate structures or all that and they'll say, “Well, just give me a five-year straight amortization.” And that may very well be the best option for them, but that conversation that we have with business owners and talking about the equipment, talking about where they're going, talking about their financial needs and pulling all that together and making sure you're making an informed decision to best fit your needs. That's who we are and I think that's how we differentiate equipment finance from traditional bank term loan financing.
Mark Meloy:
Yeah, that's a good point. One of the things that I learned early on in my banking career is this idea of matching, right? That you really want the amortization, as it relates to a capital asset to line up somewhat with its useful life or something less than that, right?. Especially in the equipment finance world where you've got a balance at some point in time that is greater than the disposal value of the equipment. That's an important consideration to be made. I think it's something that we always keep in mind as a financial partner for businesses. I don't know if that's always a consideration a lot of times with certain competitor providers.
David Sook:
Yeah, you always want to keep yourself nimble. You always want to keep options open and different financing structures can provide that flexibility, whether it's the finance company taking a residual position and shifting that risk to us, versus the business owner, whether it's a shorter term, longer term financing based on that asset valuation, what the perceived useful life of that asset is, that's the critical piece. The other thing to understand is just because the guy or gal down the street has a truck and they just ran it for 10 years, doesn't mean that it's going to work for 10 years for your operation, your organization. So it's very specific and the answer for one company for the same asset, may be a different answer, a different structure, I should say, different financing structure. I think that is what we bring to the table, is understanding those options.
Mark Meloy:
Stu, can you describe what the typical process might look like? Kind of the pre closing parts that go into it, what the financial documentation might look like and is that vary or different by industry type?
Stu Goddard:
The front-end process starting with the very simple, it's not even a full page, it's really a half page credit application. Most of our transactions are processed and underwritten within an hour or so at worst. So, that all process is very similar across industry segments, it really starts to differ a little bit on the back end documentation side. The documentation process is very convenient and short compared to what some bars may be used to when working with their bank and a 30- or 40-page documentation package, that's not us.
Stu Goddard:
Our documents typically are one- to two-page loan or lease document with whatever required supporting document that may be required given the industry or the equipment type. But there are some variances there, but no matter what industry it is, it's a very short, a very simple, whether it's an eDoc documented transaction, email documents to a client with signatures coming back via email. I talked about convenience, if somebody is looking to pick up, say a dump truck tomorrow, they really don't have a lot of time to go through a long drawn-out process to get their loan approved, documented and the dealer funded. We do all that as quickly as we absolutely have to and it's not uncommon to all that to happen in the same day.
Mark Meloy:
Good, great explanation. So what sets us apart? What makes First Business Bank good at this line of business compared to our competitors? David, I'll start with you on that.
David Sook:
Sure, I think it's a couple of things. First of all going back to the conversation earlier that Stu touched on, is our industry expertise. We have a depth of knowledge and experience in a variety of industries and that is important because when we come in, we talk to a business owner about their business, we're on chapter four of book when we sit down with them, they don't have to explain what the life cycle is of the equipment. They don't have to explain to us the dynamics or the seasonality of their business, we have a general understanding for that as we walk in.
David Sook:
Secondly, we're small enough where we can customize. We're not, as I mentioned before, we're not a one size fits all. We love to sit down and listen to our customers and we love to meet, we love to chat with them, learn about their business, learn about their challenges and come back to them with some different options and structures that would fit their specific needs. So I think it's that ability and if you look at First Business Bank's Net Promoter Scores, that prove how we treat our customers, how we work with our customers. We're very hands-on, it's been a challenge for everybody over the last 18 months or so in person meetings, but we love to get out, we love to tour our customers a facility, see their business, see the excitement in their face about their business and where they're taking it and being a part of that and understanding that is, I think, really what differentiates who we are and how we go to business.
Mark Meloy:
Stu, anything to add?
Stu Goddard:
I like to say that one of the central pillars of our value proposition is the fact that we kind of combine the best of both worlds, we're a smaller niche lending group attached to a banking organization, which allows us to provide a wide range of competitively priced financing options to our clients. So combining that industry expertise within the markets we serve with the personalized service that David touched upon, everybody likes to go out and meet people and shake hands. So we use a very personalized hands-on approach to delivering our product to our clients. We don't utilize call center personnel, if a supplier or a customer is working with any of our individual salespeople, that's the person, single point of contact, Dave. Any questions at all, either during the sales cycle or even after the closing in the loan, that's the person they can call. And if that person can't answer the question, they know who to go to to get the answer and get back to them very quickly. So there's no hunting around for 18 different phone call relays to get to the right people.
Mark Meloy:
What size dollar transactions are we talking about in terms of First Business Bank's focus?
Stu Goddard:
Our primary focus is what we in the industry call small ticket segment, generally under half a million dollars, but we routinely and regularly entertain larger transactions, really up to the banks legal lending limit, which Mark, you would know better than I at this point in time with that is. 15, [crosstalk 00:14:45] 20 million dollars. Pretty much anything that any of our suppliers and clients are looking to borrow, we can facilitate that financing.
Mark Meloy:
So I'm going to ask each of you this question, if you got one bit of advice that you can offer to a business owner considering a capital equipment acquisition and how they're going to pay for it or how they're going to acquire it. What might you suggest to them that they consider as it relates to equipment finance? Stu, I'll go with you first.
Stu Goddard:
Beyond the obvious, meaning make sure you go to a direct lender. If it's not us, make sure it's a bank, you don't want to go to an intermediary or broker because they're just going to mark up funds. There are some very fine independent finance companies out there, but again, their cost of funds is higher than a bank. So first and foremost, talk to a bank that has subject matter expertise in your industry and with the equipment you're looking to acquire. And then beyond pricing, read the contract, make sure there's no nefarious clauses, a hidden fees and things of that nature, which unfortunately, some companies out there are known to utilize. And that just artificially raises the cost of capital for that bar.
David Sook:
I would say the refreshing thing from our perspective, and I had a call last week with a manufacturing firm, is to have open dialogue. Talked about communication and listening, and the more that we can understand the client's business, where they are, what their challenges is, what they're trying to solve, the better partner we can be in working up solutions and working up options for them to consider to finance their equipment.
Mark Meloy:
David and Stu, thanks for taking time to share your thoughts and your experiences with our audience today. And to our audience, thanks for listening to this conversation, we hope you gained some insight on the considerations of financing your new equipment.
Mark Meloy:
And remember to watch for our upcoming podcasts on using equipment finance as an option for vendors, distributors, and dealers who sell equipment. Once again, thanks for listening and join us next time on the First Business Bank podcast.
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