The client was a new business in the heavy plant hire business. Both directors worked full time in the mining & construction industries and were very experienced with this type of plant & equipment. They had identified an opportunity in the market for a business to provide plant & equipment on a dry hire basis.
There were a number of hurdles in securing finance most notably that the business was a new venture with no trading history, the type of equipment and the large finance amount. The directors had prepared a very detailed business plan and each piece of equipment to be financed was supported by a signed contract predominately on a 6 month rollover basis. Both directors were continuing in their full time employment and were financially strong so their PAYG income was more than sufficient to cover their personal commitments however the issue of demonstrating ability to service was still a major factor.
We approached a number of major financiers and all but one were not prepared to support the business until a minimum of 12 months trading was completed.
One Lender were prepared to consider financing and in subsequent discussions with the client and the lender we developed a strategy which achieved a positive outcome for both parties.
We structured their initial finance contracts over a maximum term of 24 months with the repayments for the first 6 months being significantly higher. These higher repayments were equal to 50% of the monthly contract income. In months 7 – 12 the repayments for each month were reduced by 15%. This meant that at the completion of 12 months the client had paid off a significant amount of the debt. The strategy worked very successfully because we were able to match their income vs repayments and it enabled the client to build significant equity into each item of plant in a short time. It also meant that in the 2nd year the remaining repayments were significantly lower which gave the client the option to either retain the plant or if work slowed they could sell the plant and achieve a strong profit on sale.
The client has now been in business 4 years and financing on a more standard basis has been secured through both the original lender and another major lender and the client has an excellent track record with both financiers.
The strategy worked because the client was open to the methodology and could see the cashflow benefit by equating income to repayment in the initial 12 months and the lender supported the client because it could justify its ability to service criteria.
The Client has now sold some of their existing plant and the structured repayment strategy has enabled the client to make significant profit on sale which has secured their financial position and also enabled them to grow with new work opportunities.
As an interlude to the above scenario with the down turn in the Mining Industry the company was able to dispose of the assets and repay the residual debt and make profit on the assets.
The accelerated payment structure helped the business to manage its financial commitments without the pressure of having to repay the debt when income fell away.