Mar/Apr 2015 • volume 3 • issue 2 | www.canadianequipmentfinance.com
Lending Report: Managing the headwinds in commercial lending
Regulatory: ELFA looks for revisions to Basel III Telematics: Upwardly Mobile UBI Observations: The Five Gallon Overhaul PM40050803
contents March/April 2015 Volume 3 Number 2 Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com Editor Karen Treml karen@canadianequipmentfinance.com Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com
ELFA REPORT: The ELFA reports that new business volume is up, while the overall MCI-EFI shows a slight easing from the March index. The ELFA also discusses five key benefits of equipment finance for small business. »4
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Factoring quickly adds cash flow back into a company »10
Lending REPORT
EQUIPMENT LEASING 2015 A look at managing headwinds in commercial lending »12 Circulation Department 302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 • f: 905.201.6601 info@canadianequipmentfinance.com www.canadianequipmentfinance.com Subscriptions available for $40.00 year or $60.00 two years. ©2015 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Canadian Equipment Finance should be directed to the publisher.
TAX MATTERS
NEWS »7
Five Tips to Simplify Taxes »20
Regulatory BASEL III The ELFA proposes revisions to ‘The Basel Approach for Credit Risk’ »14
TECHNOLOGY REPORT: Cloud Computing
Also Publishers of Payments Business www.paymentsbusiness.ca
What is the cloud and why does it matter? »16
Made possible with the support of the Ontario Media Development Corporation
A record breaking turnout »21
TELEMATICS
Upwardly Mobile UBI »22
Where to go. What to see. »24
Observations
Contact Management www.contactmanagement.ca
Financial operations www.financialoperations.ca
NHES 2015
EVENTS
Canadian Treasurer www.canadiantreasurer.com
Direct Marketing www.dmn.ca
AT THE SHOW
Your Business
Three Habits of Highly Effective Credit Managers Experienced credit analysts are critical »18
The Five Gallon Overhaul Fresh paint can mask underlying issues »26
Ontario Interactive Digital Media Tax Credit
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ELFA Report
March new business volume up The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index’ (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $903 billion equipment finance sector, showed their overall new business volume for March was $8.9 billion, up 25 per cent from new business volume in March 2014. Volume was up 46 per cent from $6.1 billion in February. Year-to-date, cumulative new business volume increased 17 per cent compared to 2014. Receivables over 30 days were 1.2 per cent, up from 1.1 per cent the previous month and from one per cent the same period in 2014. Charge-offs were at an all-time low of 0.2 per cent for the 13th consecutive month. Credit approvals totaled 78.7 per cent in March, up from 78.1 per cent in February. Total headcount for equipment finance companies was up 3.9 per cent year over year. Separately, the Equipment Leasing & Finance Foundation’s ‘Monthly Confidence Index’ (MCIEFI) for April is 70.7, an easing from the March index of 72.1, which was the highest level in four years. ELFA President and CEO William G. Sutton, CAE, said: “Equipment finance companies in many industry sectors are reporting a robust first quarter of the year. The March new business volume is indicative of strong capital spending, influenced by businesses taking advantage of continued low interest rates, perhaps in anticipation of reported tightening of monetary policy by the Fed. Credit quality metrics are mixed, with delinquencies edging upward counterbalanced by monthly losses remaining at historic lows.” Bradley R. Brolsma, President, Merchants Capital Resources, Inc., said, “While there is a general sense within our industry that deal flow is not where it could be, the 17 per cent growth in first quarter new business certainly doesn’t seem to bear that out. Clearly, industry numbers are outpacing 2015 expectations of a four to five per cent increase in annual expenditures for equipment and software and that’s nothing but good news for our industry. That said, the rather dismal global economic numbers still point to the need for cautiousness in assessments of overall credit conditions going forward. The marketplace doesn’t need any bad news or surprises right now.” 4
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
April 2015 survey results: The overall MCI-EFI is 70.7, an easing from the March index of 72.1. ◉◉ When asked to assess their business conditions over the next four months, 44.4 per cent of executives responding said they believe business conditions will improve over the next four months, down from 50 per cent in March. 55.6 per cent of respondents believe business conditions will remain the same over the next four months, up from 50 per cent in March. None believe business conditions will worsen, unchanged from the previous month. ◉◉ 48.2 per cent of survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, up from 41.7 per cent in March. 51.9 per cent believe demand will “remain the same” during the same four-month time period, down from 58.3 per cent the previous month. None believe demand will decline, unchanged from March. ◉◉ 25.9 per cent of executives expect more access to capital to fund equipment acquisitions over the next four months, up slightly from 25 per cent in March. 74.1 per cent of survey respondents indicate they expect the “same” access to capital to fund business, down slightly from 75 per cent in March. None expect “less” access to capital, unchanged from the previous month. ◉◉ When asked, 51.9 per cent of the executives reported they expect to hire more employees over the next four months, a decrease from 70.8 per cent in March. 48.2 per cent expect no change in headcount over the next four months, up from 25 per cent last month. None expect to hire fewer employees, down from 4.2 per cent who expected fewer in March. ◉◉ 7.4 per cent of the leadership evaluate the current U.S. economy as “excellent,” down from 12.5 per cent last month. 92.6 per cent of the leadership evaluate the current U.S. economy as “fair,” up from 87.5 per cent in March. None rate it as “poor,” unchanged from the previous month. ◉◉ 40.7 per cent of the survey respondents believe that U.S. economic conditions will get “better” over the next six months, a decrease from 45.8 per cent who believed so in March. 55.6 per cent of survey respondents indicate they believe the U.S. economy will “stay the same” over the next six months, an increase 54.2 per cent in March. 3.7 per cent believe economic conditions in the U.S. will worsen over the next six months, an increase from none who believed so last month. ◉◉ In April, 59.3 per cent of respondents indicate they believe their company will increase spending on business development activities during the next six months, an increase from 58.3 per cent in March. 40.7 per cent believe there will be ‘no change’ in business development spending, a decrease from 41.7 per cent last month. None believe there will be a decrease in spending, unchanged from last month.
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ELFA Report
Equipment finance advantageous The ELFA has provided five key benefits that make equipment finance an advantageous option for small businesses:
1. Get 100 per cent financing with no down payment: Unlike with most traditional lenders, it is possible to arrange 100 per cent financing of equipment with no down payment. This is a critical benefit, since cash flow is often a concern for small and new businesses. This allows the business to hold on to cash, or working capital, and use it for other areas of the business, such as expansion, improvements, marketing, or R&D. 2. Eliminate the risk of ownership: A business just starting out can use equipment financing to help lessen the uncertainty of investing in a capital asset until it achieves a desired return, increases efficiency, saves costs, or meets other business objectives. 3. Keep up-to-date with new technology: To be on the cutting edge and be competitive, businesses often need access to new technology. Leasing, loans, and other financing can enable small businesses to acquire more and better equipment than they could have without financing. In addition, businesses that use lease financing can avoid the risk of owning obsolete equipment, since many agreements allow for easy and fast equipment updates. 4. Plan expenses for cash flow and business cycle fluctuations: Financing equipment allows for greater certainty in budgeting by setting customized rent payments to match cash flow and even seasonal cash flows. 5. Obtain the convenience of product and service bundling: Certain financial products allow businesses to finance the entire cost of equipment, including installation, up-front maintenance, training and software charges, thereby packaging systems and ancillary products and services into a single solution. This makes the equipment acquisition easy to manage and frees up the business to focus on its core operations.
Equipment leasing and finance industry confidence eases from four-year high
The Equipment Leasing & Finance Foundation (the Foundation) ‘2015 Monthly Confidence Index for the Equipment Finance Industry’ (MCI-EFI), designed to collect leadership data, the index, reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $903 billion equipment finance sector. Overall, confidence in the equipment finance market is 70.7, easing from the four-year high of 72.1 in March. When asked about the outlook for the future, MCI-EFI survey respondent Valerie Hayes Jester, President, Brandywine Capital Associates, Inc., said, “We have seen an increase in requests for equipment financing this month. We attribute this demand to increased confidence in the economy and potential concern that interest rates may begin to rise in the fourth quarter. Our economy has shown tremendous resilience in these last years and that has influenced the mindset of those that need to purchase equipment for businesses. Capital and credit windows are at historic points; business owners know that this time is a good one to invest.”
Barbara Goodstein recipient of award for legal excellence The Equipment Leasing and Finance Association (ELFA) has awarded Barbara Goodstein, Partner at Mayer Brown LLP , the ‘Edward A. Groobert Award for Legal Excellence’. Goodstein received the award at the ELFA Legal Forum in Nashville. ELFA Legal Committee Chair Brian Kestenbaum, General Counsel at LEAF Commercial Capital, presented the award to Goodstein in recognition of her significant contributions to the equipment leasing and finance industry and the association’s Legal Committee. Goodstein has been an active member of 6
the ELFA for over a decade. She currently is a member of ELFA’s Legal Committee Subcommittee on Air, Rail and Marine. S he served as a member of the association’s Legal Committee from 2002 to 2004 and as a member of the ELFA Board of Directors from 2004 to 2007. Goodstein has made numerous presentations and participated on numerous panels at the ELFA Legal Forum, an annual event for attorneys serving the equipment finance industry. She has also contributed legal articles to the association’s Equipment Leasing
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
& Finance magazine. In particular, she has authored a number of articles on the impact of New York law on equipment financing. In doing so, she has both effected change in the law and educated attorneys about equipment financing in New York. The Edward A. Groobert Award for Legal Excellence is named for ELFA’s long-time Secretary and General Counsel Edward A. Groobert, who was active in the legal affairs of the association from the mid-1960s until his retirement in 2010.
News
GE Capital Fleet introduces fleet analytics platform
Quick facts
GE Capital Fleet Services has introduced BrightWorks* Insights, an advanced fleet analytics platform. The BrightWorks Insights platform is GE Capital Fleet Services’ core engine for bringing together data from drivers, vehicles, fleet services, and third parties to enable companies to make smarter fleet management decisions. “Improved data and analytics technologies are driving change in fleet management. Fleet vehicles and management services are more connected than ever,” said Kristi Webb, CEO of GE Capital Fleet Services. “When you combine our BrightWorks advanced analytics with deep fleet expertise, customers have the information they need to make smarter decisions for their businesses.” BrightWorks Insights technology also is powering a new, more robust mobile driver app, set to launch later in 2015. The app helps to spur positive changes in driver behavior, combining useful and essential apps – such as a trip tracker and fuel and maintenance locators – with BrightWorks-driven observations and communications designed to improve mileage, maintenance and safe driving habits. The result uses analytics to create a more holistic and effective solution. “With connected vehicle technology becoming more commonplace, fleet management is increasingly about turning vast, complex data sets into actionable insights and measureable outcomes,” said Brad Hoffelt, general manager, Products & Services for GE Capital Fleet Services. “The BrightWorks Insights platform combines advanced analytics with industry expertise, so that the data streaming off fleet vehicles can be turned into real-time insights.”
◉◉ The tank car regulations require any new tank car used for flammable liquid dangerous goods service manufactured on or after October 1, 2015, to be built to the TC-117 standard. ◉◉ In developing the tank car regulations, the department consulted its partners in the U.S. as well as members of the container manufacturing industry, tank car users and regulatory bodies. ◉◉ Through the Regulatory Cooperation Council, Transport Canada works closely with its U.S. counterparts to deepen regulatory cooperation in areas like this, to enhance economic competitiveness while maintaining standards on health, safety and the environment.
“Does Your Lease and Loan Management Solution Give You a Competitive Advantage?”
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NEWS
Fuchs now president, COO at Wells Fargo Capital Finance Wells Fargo & Company announced that Guy Fuchs has been appointed president and chief operating officer of Wells Fargo Capital Finance, the bank’s asset-based lending unit, effective immediately. Fuchs, a 14-year veteran of the firm, will continue to report to Henry Jordan, chairman and chief executive officer of Wells Fargo Capital Finance. In his new role, Fuchs will oversee the three core business groups of Capital Finance and the shared service teams that are critical to those groups’ operations. “By appointing Guy to this newly created role, we’ve created a framework for continuous, consistent leadership that will support our organization’s longterm growth,” said Jordan. “We saw double-digit growth in loans outstanding in 2014, and our factoring volume puts us among the largest bank-owned factors in the world. I’m confident that Guy’s extensive knowledge, leadership and industry experience will enhance our efforts for continued growth in helping our customers succeed financially.” Fuchs, with 25 years of industry experience, joined Wells Fargo in 2001 and most recently served as executive vice president and the head of the Corporate Finance group at Wells Fargo Capital Finance. Prior to joining Wells Fargo, he held various leadership roles at GE Capital and CIT Group. Fuchs earned a bachelor’s degree in accounting from Indiana University, and was a certified public accountant before entering the asset-based lending industry.
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CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
Element names Jackson VP Asset Management Element Financial announced the appointment of Craig Jackson as vice president of its Asset Management group. In this position, Jackson will oversee residual settings, asset management studies and remarketing efforts. He will report to David Kovacs, senior vice president of Portfolio and Asset Management for Element Financial, based out of their Horsham, PA location. Jackson brings to Element an experienced background with over 30 years in the asset management industry. Prior to Element, he held senior level roles at ICON Investments and Chancellor Fleet. Jackson started with ICON in 2006 where he was responsible for valuation of equipment and the servicing of a $1 billion portfolio, consisting of energy related assets for oil, gas and coal, industrial assets for aerospace manufacturing, commercial printing, transportation, telecommunications, shipping, and aircraft. Most recently he held the position of managing director for Asset Management at ICON. “We are excited to have Craig join the management team at Element,” says Kovacs. “His experience will be invaluable in Element’s growth, especially as we expand in the Energy and Transportation industries.”
NEWS
Minister Raitt and U.S. Secretary Foxx announce next generation of stronger, safer rail tank cars The Honourable Lisa Raitt, Minister of Transport, and U.S. Secretary of Transportation, Anthony Foxx, unveiled a new class of rail tank car for flammable liquids. This newer, stronger tank car will be used for the transportation of flammable liquids, such as crude oil and ethanol. The new standard is the result of collaboration on both sides of the border, with a joint goal of strengthening the safety of the two countries’ inter-connected rail networks. The new TC-117 standard includes enhanced safety features that represent a considerable improvement over previous tank car standards. The new tank car regulations will be applied first to cars carrying crude oil by all railway companies in Canada and the United States. This will translate into better protection for communities in both countries. The new TC117 tank car will be jacketed and constructed with thicker steel, thermal protection, a full head shield, top fitting protection and a new bottom outlet valve. Transport Canada has taken a holistic, integrated approach to safeguarding the public during the transportation of dangerous goods by rail. This regulation builds on previous regulatory actions including enhancements to train operations, track inspections, train speeds, sharing of information with municipalities, emergency response assistance plans and classification. The tank car regulations formalize the commitment made by the Minister on April 23, 2014, to phase-out the DOT-111 tank cars. The regulations establish the prescriptive and performance requirements to retrofit a tank car, as well as the retrofit schedule for DOT-111 and CPC 1232 tank cars used to transport flammable liquids. This approach removes the least crash resistant tank cars from crude oil carriage first, focusing industry’s efforts on the highest risk areas.
To send press announcements, please direct them to Karen Treml, Editor, at karen@canadianequipmentfinance.com
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Leading Report
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lending Report
Cash Flow Management Factoring gets cash flow back into a company By Gordon Onley
ayroll, hydro, rent, fuel, repairs, insurance. These expenses are ever present in the minds of owners of trucks and heavy equipment. They comprise the most important costs of operating any company and they need to be paid frequently and on time. Making these payments on time can strain the cash flow of even the most established company. In an ideal world, you would get paid as soon as you have completed your work. However, the reality is we aren’t always paid immediately for the goods or services we provide. This is because, like most businesses, operators of trucking and heavy equipment companies typically give their clients a minimum of net 30 day terms to pay their invoices. Many of the costs to these companies however are immediate. This creates a ‘cash flow gap’ whereby expenses are immediate, but revenues are delayed. If this gap is not managed properly, the company risks going out of business.
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Factoring pays cash Unless your company has financial backing, your only options to manage this gap are to either restrict growth or to use business financing. One form of business financing is called ‘factoring’. Factoring pays cash to trucking and heavy equipment companies in exchange for their invoices. It is a means for getting the cash flow back into a company and protecting it from bad debt. Factoring can provide peace of mind because it means that the stability and progress of one’s company doesn’t depend on the timeliness of their customers’ payments. After all, even if customers are extremely responsive and pay quickly after being invoiced, there is still a delay between the completion of the job and the payment of the invoice. Factoring provides companies with dependable cash flow, enabling them to meet ongoing expenses and putting them on the path to growth.
Credit checks An added benefit that factoring provides is that the factoring company will
“Factoring can provide peace of mind because it means that the stability and progress of one’s company doesn’t depend on the timeliness of their customers’ payments …”
conduct thorough credit checks on all the main customers and follow up with these customers until invoices are paid. This is a valuable service in that it saves time for company owners and eliminates collection problems and bad debts. This allows the owner to focus on more important business issues like sales and profitability, instead of collecting invoices. Additionally, if a factoring company factors an invoice on a nonrecourse basis, the factor takes the credit risk of the customer, protecting the client from credit loss. If you want increased cash flow while reducing the headache of credit or collections problems, factoring is the solution. There are companies, that specialize in non-recourse factoring for the transportation and heavy equipment industries. You send them your invoices with proper backup and you will typically have access to your funds the very next business day. You select the accounts that you would like to finance and the factoring company will take care of the rest. Operating a trucking or heavy equipment company is challenging enough in these tough economic times and factoring can help you manage your risk and increase your cash flow. J D Factors is one of the fastest growing financial firms in North America. For over 25 years J D Factors has provided invoice factoring and accounts receivable management for high-growth companies in a variety of sectors, including transportation and heavy equipment. Whether a start-up business or an established firm, J D Factors is commitment to giving the highest level of personal, quality service to their clients.
Gordon Onley is Business Development Officer for J D Factors, and manages client relationships in Ontario, the Prairies and Western Canada. Prior to entering the commercial finance field Gordon operated a successful heavy equipment services company. Gordon knows firsthand the financial challenges owners of heavy equipment face. Today, through J D Factors, he helps transportation and heavy equipment companies by providing costeffective financing to help them realize their business goals.
canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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Leading Report
Equipment Leasing 2015 Managing headwinds in commercial lending for Canadian lessors By Stan Prokop
ob Dylan appears to have been right – ‘The Times They Are A Changing’ – and when it comes to equipment lending in Canada in 2015, suffice to say the winds of change are blowing. A stronger Canadian economy and low interest rates have created a minor feeding frenzy in Canadian equipment financing. Canadian lessees have taken up the challenge and are replacing fixed assets and obsolete equipment with leases structured particularly for their needs. In fact, Canada’s industry trade association for lessors reports that over $67 billion of assets are under current management – and growing! While the lease industry touts ‘ financial innovation’ as a cornerstone for success, this is fast being challenged by innovative technologies adopted by other commercial lenders. Successful commercial lessors will maximize their use of technology to drive innovation in lease offerings. Commercial and industrial financing in asset acquisition is a critical source of capital for Canadian business borrowers – allowing these firms to finance inventory and receivables via traditional business credit lines. Therefore, the challenge to incorporate sound lending into the overall client relationship has never been more top of mind for management. As well, growth in lending is competing internally with other
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business drivers such as technology and operational efficiencies.
compete very effectively against larger better known ‘branded’ lessors.
Changing growth patterns
The good news
The pressure to grow portfolios and maintain pricing while minimizing losses is, at best, intense for the Canadian lease finance industry. As we’ll see, some firms have totally opted for growth by acquisition, forsaking traditional organic growth in portfolio size and quality. For example, while industry juggernaut GE Capital has chosen to exit, the business firms such as Wells Fargo are widely reported to be candidates for that portfolio acquisition. As industry players such as GE grew in size to astronomical proportions they at the same time became subject to potential government regulation. It would appear size isn’t everything! Those larger portfolios also require more servicing and monitoring, creating addition expense for commercial lessors. Successful lending is challenging if only because lessees, vendors, and other referral partners are called upon by competitors with seemingly aggressive offerings on pricing and approval. While lessors for decades have touted the lease offering as the bank alternative, they themselves have been subject to new players identifying themselves as the ‘other’ new alternative. Growth of the internet has allowed companies to both expand and grow locally via search engine optimization (SEO), which has allowed small lessors and third party brokers to
If there’s any good news on the horizon it’s that bad debt levels appear to be at very reasonable levels despite the surge in lease financings in Canada. Has credit quality in fact deteriorated? It’s probably too early to say. One possible warning sign is that some firms actually use business revolving credit lines to accommodate some of their asset acquisition need, which, traditionally, is a ‘no no’ in asset acquisition policy for any company, i.e. utilizing short term financing to address long term asset acquisition needs. Call it a threat, or perhaps just competition, but an entire new breed of alternate lender has emerged as direct competition to Canadian lessors. Firms such as ‘On Deck’ have generated billions of dollars in loans to the SME sector in the U.S. – and no surprise they recently announced a move into the Canadian marketplace. While no one seemingly disputes that the need to finance assets is growing, success for lessors will depend on convincing Canadian lessees that lease finance not only was, but still is, a good idea.
“The pressure to grow portfolios and maintain pricing while minimizing losses is, at best, intense for the Canadian lease finance industry …” 12
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
Assessing the threats While alternative lenders typically have ‘mezz’ pricing attached to their transactions, it offsets the higher credit risk profiles they accept for portfolios. Being able to successfully assess the ‘new’ alternative financing threats will be a key to successful leasing for Canadian lessors. Successful lessors will no doubt be in a position to understand the lessee need as a differentiator for competitive non-lease offerings. These alternative lenders to the lease offering in some cases actually mine social
lending Report media data on firms to assist in final credit approval decisions, perusing, for example, customer reviews. So much for FICO scores and financial statement analysis!
Driving lending pressure What then are the factors that are driving lending pressures in the Canadian lease marketplace? They include issues such as more competition, a better economy, seemingly reduced credit standards (is cash flow based credit analysis disappearing?), and access to capital for the lessors themselves. Finally, in some cases, the ‘bundling’ of portfolios via the securitization process has created a potential higher risk to ultimate repayment of the leases. Providing non-bank credit lines to business borrowers and claiming to have proprietary lending algorithms have made these firms a credible threat to Canadian lessors. Even some significant credit union players have entered the industry to fill voids left by banks and
other commercial lenders. While most lessors recognize the need to invest in new technologies, many are in fact still ‘in process’, or even worse, anticipating ‘no change ‘ in technology platforms. Commercial lending in some ways no longer relies on tried and true ‘character/ capacity/capital’ analysis and relies instead on technology offerings from Telco’s and software providers that drive lessors to automated lending practices. Some good news though – the significant financing dollar needs required by industries such as aircraft, construction, technology, oil and gas, and rail will almost always demand a traditional lease solution. Lending in Canada has never been more complex. Lessors must originate, service, and generate reasonable profits in an ever challenging environment. Lessors who focus only in certain geographies or market niches are doubly challenged. Never in history has the client application process been so intertwined with actual underwriting and servicing of the
portfolio. Lessors with very complex approval workflow are in some cases doomed to fail. Further complicating the issue is that top experts tell us that the majority of business owners and financial managers prefer the faceto-face borrowing process. That’s the conundrum – algorithms versus people! While some lessors might well be forgiven for considering the current competitive commercial leasing environment as ‘brutal’, perhaps the reality of the matter is that the true challenge is focusing on the right mix of profit margins versus volume and that dramatic ‘outside the box’ thinking with inherent risk might in fact not be required. Let’s also not forget those ‘wild cards’ such as economy weakness and geopolitical risks. Stan Prokop is principal at 7 Park Avenue Financial and specializes in business financing for Canadian firms, such as working capital, cash flow, asset based financing, equipment leasing, franchise finance and Canadian tax credit finance. Founded in 2004, the company has completed in excess of $90 million of financing for Canadian corporations. www.7parkavenuefinancial.com
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Register today! Go to: www.analytics-for-insurance.com/canada canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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REgulatory
ELFA Proposes Revisions To ‘The Basel Approach For Credit Risk’
Proposals call for risk weightings to promote investment in capital equipment asel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision, and risk management of the banking sector globally. These measures aim to: ◉◉ improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source ◉◉ improve risk management and governance
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◉◉ strengthen banks’ transparency and disclosures.
The reforms target: ◉◉ bank-level, or microprudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress. ◉◉ macroprudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time.
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks. The Equipment Leasing and Finance Association (ELFA) has responded to a new proposal regarding credit risk under the Basel framework. ELFA is calling for risk weighting treatment for commercial leases and loans backed by capital equipment, in response to a proposal issued for comment by the Basel Committee on Banking
Regulatory Supervision. It is significant to note that ELFA, the Canadian Finance and Leasing Association (CFLA) and Leaseurope all have submitted comment letters in responding to the Consultative Document on Revisions to the Standardised Approach for Credit Risk issued by the Bank of International Settlements (BIS). BIS called for comments on all aspects of the consultative document and the proposed standards text, particularly on the design of the framework. ELFA’s response recommends enhanced granularity and risk sensitivity, updated risk weight calibrations and better clarity on the application of the standards to achieve BIS’s goal to strengthen the regulatory capital standard. Specifically, corporate exposures consist of various types such as investment grade bonds, non-investment grade bonds, bank corporate loans, small and medium sized business loans, municipal loans and other types of debt. Each business type presents a unique risk profile that calls for treatment as specialized lending. ELFA, CFLA and Leaseurope’s responses to the proposal each support risk weightings on commercial leases and loans that reflect the default risk of their customers and the security offered by equipment collateral. The associations argue and show with historical data that default rates are lower for equipment finance debt when compared against other forms of corporate exposures such as non-investment grade bonds or bank corporate loans. The three organizations represent key industry players in the United States, Canada and Europe. ELFA represents 580 companies in the U.S. equipment finance sector; CFLA represents over 230 firms active in the asset-based finance, equipment and vehicle leasing industry in Canada; and Leaseurope represents 46 associations throughout Europe in the leasing, longterm and/or short-term automotive rental industries. According to ELFA, the current risk weightings from BIS treat corporate lending the same by applying a 100 per cent risk weighting across all corporate exposures or a 75 per cent risk weighting across most retail exposures (including
many small business leases and loans). Commercial loans and leases backed by equipment have a history of lower credit losses than other exposures, which qualifies them for risk weightings different than the riskier corporate exposures. ELFA believes that risk weightings should reflect the underlying default and loss rates of its members’ leases and
loans. “If higher risk weights are applied on a ‘one size fits all’ approach for corporate exposures, then the businesses that use equipment finance may pay a higher cost for access to capital than their risks warrant,” said William Phelan, president of PayNet and an ELFA and CFLA board member.
canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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Technology Report
Cloud Computing What is the cloud and why does it matter? By Vladimir Kovacevic
loud computing has been around for more than nine years, but it was 2006 when Amazon popularized the term with the introduction of ‘Elastic Cloud Computing’. This makes cloud computing mature and established technology – because as we all know, nine years in real life is like 1001 in techie years. That makes the question of “to use the cloud or not?” more and more dated every month. However, even to this day there are many misconceptions and a fair degree of uncertainty surrounding the whole issue. The ones I hear all the time are: “Is it secure?”, “How do I get access to my data?”, and “Is it compliant with regulations?” These are all great questions and as the technology has matured, the answers to these questions have been evolving. An example of the evolution of cloud computing, is that the services offered by Microsoft, Google, or Amazon, the big three cloud providers, continue to be better, faster, and cheaper. Most recently the costs have dropped to the point where it’s not possible to have a reasonable ‘in-house’ configuration that’s comparable and competitive to what the cloud providers are offering. These recent changes make the cloud related questions even more relevant than ever.
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So, what is the cloud? This is a question that doesn’t have a simple answer that everyone can agree on, but is clearly a question that needs to be answered before we see mature businesses and industries shift to the cloud infrastructure. So, rather than focusing on a complex and unavoidably techie answer, I think it’s better to answer the question with an analogy. The best analogy that I recently heard was comparing cloud computing to the industrial revolution. I couldn’t agree more. Just like the industrial revolution, cloud computing is many different things to many different businesses and individuals, but overall it’s a powerful force of change that is enabling many technology start-ups to grow at astronomical rates. The best and most well-known example is Netflix whose entire infrastructure is running on Amazon’s cloud services. Last year Netflix did $5.5B in revenue and reached a truly amazing milestone of over $1M in revenue per employee. The same infrastructure they use is at the disposal of any start-up in the world for less than a cost of a new laptop per month. How awesome is that? So why wouldn’t we all use cloud computing? Depending on who we talk to, there are different objections, questions, and concerns that are raised. As it turns out, all of them can be grouped into two main objections:
“Cloud computing is many different things to many different businesses and individuals, but overall it’s a powerful force of change that is enabling many technology start-ups to grow at astronomical rates …” 16
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
1. The intangible objection Given the Netflix example, most people will agree that cloud computing is great, scalable, and cost effective – but is it for ‘real’ businesses? Is it for businesses that were around long before the cloud and all related technology even existed? How can such businesses entrust their customer and other sensitive data to something abstract like the cloud? This intangible objection is something that I run into all the time – and I believe that it’s caused by the abstract nature of the name used to describe this awesome modern service that allows us to outsource our infrastructure to a trusted provider. The very name ‘cloud’ implies that our sensitive data is somewhere out there and that we can’t really control or trust who or what has access to our data. This is why I stopped using the word ‘cloud’ and started to refer to this great service as ‘managed infrastructure’. Managed infrastructure is easy to explain and easy to understand. Take the servers you have today, which are most likely already virtual servers running on VMware, and replace the underlying hardware infrastructure that’s been managed and maintained by your inhouse IT department with a hardware infrastructure that is managed by trusted providers. That’s it. It’s still your servers, completely managed and controlled by your IT department. Instead of running on your own hardware hosted at costly data centers (and most likely insufficiently redundant) these servers are now running on state of the art hardware managed by one of the big three providers. Better, faster, more secure, and less expensive.
2. The legal objection This is a Canada-specific objection, raised simply by the fact that infrastructure used by the three big providers is physically located in the U.S. So, does this matter or not?
Technology Report There are two federal laws that protect the privacy of Canadians – the Privacy Act and Personal Information Protection and Electronic Documents Act (PIPEDA). The Privacy Act is related to the rights to access personal information that is held by the government and as such applies only to government institutions. Therefore it doesn’t apply in this case. The second act, PIPEDA is the one that governs how private and public sector businesses that acquire personal data for commercial purposes need to manage such data. PIPEDA is a complex and long act, but in essence it states that a business that collects personal data for the purpose of commercial activity is fully accountable and responsible for the protection of collected data. However, it does not require all Canadian businesses to store collected data in Canada. In addition to PIPEDA which is a federal act, there are other provincial acts related to personal information protection that address how public companies need to handle personal information or have acts that have been declared to be ‘substantially similar’ to PIPEDA. Considering the current Canadian legislation there is nothing that would prevent a private Canadian business from using managed infrastructure services offered by a company outside of Canada, as long as the Canadian business performs the same due diligence they should perform when hosting the data inside Canada. This due diligence should cover different aspects of data management such as physical security, data encryption, deletion of data after the contract is terminated, etc. Given that both the legal and the intangible objection can be addressed in a reasonable manner and that the cost of managed infrastructure offered by cloud providers has dropped significantly over the past few months, I believe that we are at the tipping point where more and more businesses are going to move their hosted infrastructure from in-house to one of the large providers. This trend has already started with a wide adoption of applications that are running on cloud based infrastructure. Odds are that either you or someone you know is already using Microsoft Office
365 and/or Salesforce.com to run their day to day business. So why does cloud computing matter? It matters because just like the industrial revolution, the cloud is fundamentally changing how business is done and what it means to be a successful modern enterprise that can attract the best talent and provide the best customer experience.
Vladimir Kovacevic is a chief technology officer at Inovatec Systems. Inovatec specializes in providing innovative software solutions and helping businesses establish a scalable, data driven business model within the automotive and equipment finance industry. Sources: Provincial Canadian Geographic Restrictions on Personal Data in the Public Sector – The Center for Information Policy Leadership – Hunton & Williams LLP, 2008 http://www. hunton.com/files/Publication/2a6f5831-07b6-4300-af8d-ae30386993c1/Presentation/ PublicationAttachment/0480e5b9-9309-4049-9f25-4742cc9f6dce/cate_patriotact_white_ paper.pdf FREEDOM OF INFORMATION AND PROTECTION OF PRIVACY ACT [RSBC 1996] CHAPTER 165 http:// www.bclaws.ca/civix/document/LOC/complete/statreg/--%20F%20--/Freedom%20of%20 Information%20and%20Protection%20of%20Privacy%20Act%20[RSBC%201996]%20c.%20 165/00_Act/96165_03.xml#division_d2e3112 Office of the Privacy Commissioner of Canada – Acts and Regulations - Privacy Legislation in Canada https://www.priv.gc.ca/resource/fs-fi/02_05_d_15_e.asp
canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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Your Business
Three Habits Of Highly Effective Credit Managers Experienced credit analysts are critical to the success of any lending organization By Stan Prokop
ith a tip of the hat to Steven Covey’s well known business book, ‘7 Habits of Highly Effective People’, we look at the complex role of credit in the leasing industry. Can credit managers successfully transition and grow into agents of change within Canadian lease and finance organizations? They certainly have that ability if they adopt and practice tried-and-true best business practices and couple them with effective tools that aid in the managing of today’s demanding business environment. As the eternal debate on credit analysis continues (is it an art or a science?) there is no debate that the insights of experienced credit analysts are critical to
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the success of any lending organization. This role is often strategic to the firm’s overall growth and success plan. So, what are some solid habits that successful credit managers can utilize to deliver maximum credit and collection performance to their organizations? Moreover, what tools are available to facilitate delivery of corporate objectives relating to the credit function? Let’s review some key day-to-day activities in the back office of any credit and collections shop in the context of repeatable habits then lend themselves to business and career success.
1. Demonstrating a ‘win/win attitude’: One great way to view your role in a larger corporate credit environment is as a combination of business partner and
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
cop. Successful credit managers convey financing/credit risk properly, i.e., the ‘cop’ role, while still having the sales team view the credit role as a business partnership to increase revenues and achieve sales goals - i.e. corporate sales and profit goals. That is the careful balance that credit departments are chartered with. The dual concept of credit retaining both a profit and service focus is key. The adoption of a win/win attitude requires constant forward thinking and a demonstration of a ‘can do’ mentality. Passive attitudes don’t work in credit management; in fact, they can guarantee failure and inability to achieve credit metrics. Looking for an example? Many top financial analysts and economists deem certain industries as ‘out of favor’. If your company is marketing or selling
Your Business into such an environment, accessing research in areas such as market trends and interpreting those trends for sales and management demonstrates forward thinking.
2. Challenging outdated processes/tools/methodologies: Analytical skills through experience and ongoing training are the toolkit of the credit manager. Explore state-ofthe-art scoring and financial statement spreading. It provides consistent information across different geographies and business segments. How many credit managers can safely say they have the right tools to anticipate portfolio solvency risk? The right tools help make good decisions and move numbers. Coupled with front/ back office integration and adequate staffing (and management support) revenues and profits can be maximized. While technical tools and automated
processes are critical, credit teams can also be motivated by other forms of development. For instance, a credit manager could bring junior collections staff on sales/credit calls with new lessees or vendors.
3. Focus on the big picture: When it comes to credit management, nothing makes more sense than adopting a cradle-to-grave conception of the credit function. Credit teams play a vital part in what sophisticated financial analysts call the operating cycle. In simple terms, this is the travel of a dollar through an entire company, from the time it takes to complete an order to cash arriving on the balance sheet. The financial calculation/formula for that cycle is as follows: DSO + Days Inventory minus Days Payable = x days. Credit and treasury managers understand that the time that dollar
spends parked in lease receivables significantly impacts cash flow, return on investment, and profitability, which are key metrics of any finance organization and are directly related to taking on less risk and achieving sales goals and acceptable bad debt experience. Can the credit manager truly become an agent of change? We certainly think so, and whether it’s scoring technology or old fashioned lessee cash flow analysis it’s all about defining the role in a positive manner in the organization. In today’s competitive environment the dual role of ‘business partner’ and ‘cop’ was, and is, a highly visible role within the organization. Stan Prokop is principal at 7 Park Avenue Financial and specializes in business financing for Canadian firms, such as working capital, cash flow, asset based financing, equipment leasing, franchise finance and Canadian tax credit finance. Founded in 2004, the company has completed in excess of $90 million of financing for Canadian corporations. www.7parkavenuefinancial.com
Customized Solutions for your Equipment Financing Needs Nations Equipment Finance provides equipment financing for a variety of equipment types including: • Oil & Gas • Construction • Rail • Tractors/Trailers • Aircraft • Manufacturing and Industrial Our investment professionals have decades of experience providing financing to small and medium sized businesses. With transaction sizes ranging from $1 Million up to $50 Million, NEF can craft a customized financing solution that provides you with the necessary capital to grow your business. We have locations across the USA and Canada.
Contact Ed Stolarski, Executive Vice President • Tel: 203-229-2224 Email: EdStolarski@nationsequipmentfinance.com • www.nationsequipmentfinance.com
canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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Tax Matters
Five Tips to Simplify Taxes Organized chaos is never a good idea … By Nancy Harris
iling taxes can be stressful, especially for small business owners who already have a lot of responsibilities to juggle. If you find yourself overcome with anxiety as you reach for a shoebox filled with a year’s worth of receipts, know there is help out there. Here are a few simple steps you can follow to make tax time a little more tolerable.
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Keep paperwork organized Organized chaos is never a good idea. It’s easy to collect a pile of deductable receipts and important financial documents in a drawer, shoebox or glove compartment of your car but it’s not so easy to find or sort through the mess at tax time. Many accounting solutions offer a digital shoebox option, or a place to organize receipts. Taking the time during the year to enter and keep track of receipts will save you time during tax season. If you don’t already have a detailed filing system for all of your business paperwork, now is the time to start one.
Do your homework Part of what makes tax time so nervewracking for many is that they don’t fully understand all of the rules and regulations that pertain to them. Trying to complete any task with minimal understanding of how it works is stressful in any situation, not just taxes. Do your part to take back the power of the unknown by educating yourself on 20
the basics, as well as the latest tax code changes that apply to you. Even if you have a trusted tax advisor filing for you, it pays to be prudent by developing a clear understanding of your tax liability. For instance, you could uncover a deduction that your tax advisor did not realize you were eligible for that could save you substantially. Use online resources such as the CRA website for all you need to know about filing taxes as a small business owner.
Make a list of eligible deductions and credits Plan ahead and make a list of potential deductions and credits you may want to take advantage of at tax time. Keep in mind, donations you’ve made through the year or contributions made to your Registered Retirement Savings Plan (RRSP) are eligible for deductions. Review any outstanding debt and deduct any interest expense to the maximum extent possible. However, it is important to note that debt is only deductible if it was used to earn business or property income. Therefore, it is recommended to pay off non-deductible debt as quickly as possible.
Consult an expert As a business owner, it’s important to recognize the limitations of your skill set and take advantage of available technology to fill the gaps. An accounting software solution will help to centralize, organize and streamline your bookkeeping and records. It will also enable you to store your financial
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
statements and manage and access your records quickly. Consider using Sage 50 Accounting, an accounting software solution that comes fully equipped with built-in Canadian tax regulation compliancy. It’s recommended to have an accountant or tax advisor review your bookkeeping and tax data every few years so that you avoid any problems and save money along the way. Having computerized records will speed up their review process and make it easier for them to give you advice on how you can make your operations more profitable.
Time it right Be vigilant about deadlines. Tax deadlines are the same every year so don`t let them sneak up on you. Educating yourself about filing due dates will help you avoid paying interest or late penalties, ultimately saving your business money on avoidable expenses. Being aware of deadlines can also leave you time to thoroughly review your return. Check it twice for small errors such as missing signatures or misspelled addresses. Mistakes like these are so common that the CRA has a voluntary disclosures program, which allows you to come forward and correct inaccurate or incomplete information. As senior vice-president and general manager for the Canadian market, Nancy is responsible for building the Sage brand and growing market share in Canada. Her responsibilities include driving the strategy and day-to-day operations for the small business portfolio, including Sage 50 Accounting—Canadian Edition and Sage One—Canadian Edition. For more than 25 years, Nancy has been leading product marketing and strategy. She’s also worked for technology companies that specialize in software as a service for more than 15 years.
At The Show
The National Heavy Equipment Show, held on March 5 and 6 at the International Centre, saw an excellent turnout. With 13,772 buyers walking the show floor over the two days of the event, the attendance was the largest to date, having risen 30 percent since 2009. Attendees for the biennial show include a mix of industry professionals which include leaders in the construction, road building, land improvement, and infrastructure industries. The always popular ‘Gravel Pit’ was once again featured. It included a complete display of aggregate machinery, including equipment like crushers, conveyors, scales, recyclers, front end loaders, hammers, and drives/motors. Also featured were displays for ‘Snow and Ice Removal’ and the ‘Rental Pavilion’, which showcased the latest equipment, tools, and products for sale or rent to contractors and road building professionals. Seminars included such topics as ‘Inside Maintenance’ (keeping the machine running well), ‘Outside Maintenance’ (keeping exterior components clean and looking well), and ‘Owning the Machine’ which included information on what you need to know to acquire equipment for your business. Spread throughout the show was a focus on employee safety and worksite security which answered to the needs of safety, health, and environmental professionals from across Canada. The focus allowed attendees to get up to speed on important industry challenges, such as roadside safety for workers. The National Heavy Equipment Show ‘industry breakfast’, presented by the Canadian Association of Equipment Distributors (CAED) was held on the second morning of the show. Attendees were treated to a presentation by keynote speaker Bob Collins, senior economist with BuildForce Canada, who delivered an interesting and informative session – ‘2015: A Forecast for the Industry’. The next National Heavy Equipment Show will take place in 2017. Details will be posted at www.nhes.ca.
Jennifer O’Neill
NHES 2015
canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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Telematics
Upwardly Mobile UBI What this means for insurers, automakers and price comparison companies
By Steve McKay
wenty-two years after they were invented, 24 per cent of the world is using smartphones. By 2017, more than 33 per cent of the population will be smartphone users. These devices have become part of the way we live ‌ and drive. So what does the move to mobile UBI
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mean for insurers and automakers as the connected car becomes a reality and price comparison sites who are matching drivers and insurers?
Insurers Go mobile or go away
Consumers expect to interact through mobile so it’s important to have a userexperience designed mobile interface.
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
Mobile UBI programs work best when designed for the consumer, not the insurer. The relatively low cost of acquisition and retention with mobile UBI is creating opportunities for insurers – particularly, emerging companies who are looking to differentiate in a traditionally undifferentiated market. Mobile creates an opportunity for differentiation and enables insurers to attract consumers to their UBI platforms.
Telematics Use fragmentation to your advantage
Mobile is a fragmented industry. The volume of sizes and devices make it increasingly difficult to develop a widely accessible app, not to mention getting the app to run optimally on all devices. Given fragmentation, insurers should focus on making many ‘small bets’ across the range of technology options most common across their consumer base, as opposed to trying to optimize a few ‘big bets’. A nimble approach enables insurers to readily adapt to market shifts and use fragmentation as a competitive advantage. Avoid a ‘drag and drop’ approach to mobile UBI
Mobile UBI is not simply about converting an existing device-based UBI program to mobile. Mobile engages drivers in a way that traditional UBI devices do not, therefore, the approach needs to consider the distinct benefits of mobile – improved acquisition, retention and safety. If you just ‘drag and drop’, you may not realize those benefits. Get closer to your customers.
Mobile offers highly customizable way for insurers to get closer to their consumers. By building apps for smartphones, insurers are effectively ‘consumerizing’ services and creating engagement out of activities that were once simply data collection activities with device-based UBI. Whether it’s enabling drivers to track their own driving habits or suggesting ways to improve their skills and rewarding them for it, mobile UBI creates unlimited, low cost
opportunities for measurable engagement. Mobile UBI will play an increasingly important part in sales, marketing and service delivery across the industry, as insurers move beyond transaction-based apps to become more relevant in the everyday lives of consumers.
Automakers Figure out where it makes sense to play.
The emergence of new market players is forcing automakers to rethink the way they’re approaching the connected car. Strategy is shifting from using infotainment systems to power most apps in the car to focusing on the ones that require deeper integration with the vehicle. Given this momentum, it will be important for automakers to figure out how to most effectively plug into the telematics revenue stream.
become more seamless. Price comparison will be critical to the consumer centric model — making the transaction possible by being the place where drivers store their usage based data. Monetize your data (even more).
Translating your data into a usable format for insurers can be difficult and time consuming. Find a partner who can import your data, use your scores (or develop ones for you) and connect you to insurers seamlessly. This reduces likelihood of costly, operational challenges for internal technology and business teams.
Mobile UBI is changing the way insurers, automakers and price comparison companies approach telematics and rethink the consumer experience. But how many consumer-facing driving apps can actually succeed before the novelty of mobile UBI is expected? A “wait and see” strategy is no longer an option if you want to remain competitive in a disruptive industry. Steve McKay is the CEO of DriveFactor. For more information visit www.drivefactor.com
Create an engaging in-dash experience.
Consumers expect the indash and mobile experience to be seamless. This increases expectations for the connected car, but also creates new opportunities to engage consumers in mobile UBI and bring additional value.
Price comparison companies Make mobile transactions seamless.
As the insurance industry moves to a consumer centric model, consumers want control over their driving data, privacy and portable scores. As a result, UBI will become the norm and transactions will need to canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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EVENTS
WHERE TO GO. WHAT TO SEE. Find out more about the conferences, exhibitions, seminars and meetings in your industry
2015
April 21
May 13-14
Equipment Leasing & Finance Association ELFA Captives Best Practices Roundtable Chicago, IL www.elfaonline.org
Equipment Leasing & Finance Association ELFA Capitol Connections Washington, D.C. www.elfaonline.org
April 21
June 7-9
Equipment Leasing & Finance Association ELFA Independent Best Practices Roundtable Chicago, IL www.elfaonline.org
Equipment Leasing & Finance Association ELFA Credit & Collections Management Conference Washington, DC www.elfaonline.org
April 21-23
September 16-18
Equipment Leasing & Finance Association ELFA Executive Roundtable Palm Beach Gardens, FL www.elfaonline.org
Equipment Leasing & Finance Association ELFA 27th Annual National Funding Conference Chicago, IL www.elfaonline.org
Equipment Leasing & Finance Association ELFA Operations & Technology Conference Philadelphia, PA www.elfaonline.org
April 2
April 30-May 2
September 16-18
Lloydmedia Inc. - Payments Business Magazine Mobile Payments Workshop Toronto, ON http://www.paymentsbusiness.ca
Nat’l Assoc of Equip Leasing Brokers NAELB 2015 Annual Conference Phoenix, AZ www.naelb.org
Equipment Leasing & Finance Association Lease & Finance Accountants Conference Philadelphia, PA www.elfaonline.org
April 15-20
Equipment Leasing & Finance Association ELFA Legal Forum Nashville, TN www.elfaonline.org
September 16-18
May 6-8
October 25-27
Factoring Association 20th Annual Factoring Conference New Orleans, LA www.factoring.org
Equipment Leasing & Finance Association Public Sector Finance Forum Denver, CO www.elfaonline.org
Equipment Leasing & Finance Association ELFA 54rd Annual Convention San Antonio, TX www.elfaonline.org
April 21
May 11-12
Equipment Leasing & Finance Association ELFA Bank Best Practices Roundtable Chicago, IL www.elfaonline.org
FC Business Intelligence Analytics for Insurance Canada Summit Toronto, ON www.analytics-for-insurance.com/ canada/
March 5-6 National Heavy Equipment Show (NHES) Toronto, ON www.nhes.ca
March 12 Equipment Leasing & Finance Association 13th Annual IMN/ELFA Investors Conference New York, NY www.elfaonline.org
March 15-17
National Equipment Finance Association NEFA 2015 National Equipment Finance Summit Long Beach, CA www.nefassociation.org
April 15-18
May 3-5
Canadian Finance & Leasing Association CFLA Annual Conference 2015 Gatineau, QC www.cfla-acfl.ca
Visit us online www.canadianequipmentfinance.com/events.html 24
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
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Northstar takes pride in offering fast approvals, competitive rates, and flexible terms, coupled with friendly, personal service. Please contact Bruce Collingwood or Wayne Gray at 705-737-5595 or toll free 1-888-678-2701. www.nstarleasing.com
Since 1983, Northstar Leasing Corporation has been meeting the needs of our business clients and Broker network across Canada.
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Vendor Directory Advertising call Mark Henry at 905-201-6600 x 223 or email mark@canadianequipmentfinance.com canadianequipmentfinance.com | March/April 2015 | CANADIAN EQUIPMENT FINANCE
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Observations
The Five Gallon Overhaul Fresh paint can mask underlying issues By Rob Birnie
dvertisers have long realized that presentation is everything when it comes to marketing. Appearance is a significant factor when it comes to appraising equipment. Some effort with a pressure washer and fresh paint – a “five-gallon overhaul” – can dramatically improve the apparent condition of equipment but can also mask some serious underlying issues. Identification of these issues may require some additional analysis during the appraisal process. Equipment appraisals typically include a visual inspection of machinery in order to accurately document serial numbers as well as value contributing (and detracting) features of the equipment. This assures parties that the asset actually exists and assists in forming a basis to establish the current market values of the equipment. In most cases, a routine visual inspection identifies the most probable factors influencing value based on a number of assumptions. Unfortunately, a visual inspection (without teardown) cannot possibly identify all conditions which may influence value of the machine. Due diligence requires verification that the assets are operational; however, simply starting a machine does not ensure that all systems are in good health. Deficiencies may not be apparent until the machine reaches operating
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temperature and is placed under load and, in most cases, it is simply impractical to run every inspected machine through its paces. This is especially true during winter months. Cold weather (and we’ve certainly had our share this past winter) is a significant obstacle to verifying the operational condition of a machine. Subzero temperatures (and periods of disuse) reduce reserve battery capacity – frequently to the point that the battery will not power up consoles in order to obtain engine hours. In northern areas, temperatures can be so low that crankcase oil thickens to a point that the starter would be unable to turn the machine over – and if the machine does start, increased oil/hydraulic pressures can damage systems. Typically, a request to start a machine in these conditions can result in hours of effort to dig a machine out of the snow, to preheat the crankcase with burners and to charge batteries. The time and effort required by the equipment owner to complete these operations needs to be considered. Unless there are obvious indications to the contrary, it is reasonable to assume that a machine in winter storage has been properly winterized and that condition of the equipment has not substantially changed since it was last operated. In distress or contentious situations, we find that a visual inspection may not
CANADIAN EQUIPMENT FINANCE | March/April 2015 | canadianequipmentfinance.com
be sufficient to identify issues with the machine. In these cases, a mechanical inspection of the equipment may be necessary to accurately identify the value of the equipment. An assessment of hydraulic, electrical, and mechanical systems, and an ECM or oil sample analysis will assist in determining factors which a buyer will likely consider when purchasing the unit. A detailed estimate of repair effort and cost supports an objective assessment of value. In recent months, we’ve had assignments where an over-zealous application of paint (50-gallon overhaul?) certainly raised questions about what was being covered up. These questions were quickly addressed through a mechanical inspection. We’ve also had instances where deficiencies identified in a mechanical inspection could be safely ignored. In late February we appraised an excavator which simply would not run – the mechanical inspection report suggested that we simply “wait for warmer weather” as the tank was full of summer diesel which had gelled. Waiting for warmer weather – I think that is something that we are all doing after this past winter! Rob Birnie is a Certified Machinery and Equipment Appraiser (CMEA), Master Marine Surveyor (MMS Senior Business Analyst (SBA), and an active member of the Canadian Finance & Leasing Association. Rob has applied his hands-on experience in mechanical and marine repairs and more than 19 years of insurance damage appraisal, valuation and loss settlement experience to create and direct Verus Valuations.
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Machinery and equipment appraisal services you can trust. Verus Valuations provides accurate, timely and costeffective machinery and equipment valuation and appraisal services throughout Canada. Our experience combined with our in-house information management system ensures our clients receive detailed and consistent reporting for every assignment.
At Verus Valuations, we: • Offer accurate, independent and unbiased valuation and appraisal services with the highest level of responsiveness • Understand that timing is key in guiding our clients’ business decisions • Provide comprehensive appraisals for all machine and equipment types and sizes, from an entire industrial plant to a single piece of equipment • Produce reliable, detailed and well-organized reports that are substantiated by market research • Conduct machinery and equipment appraisals in any location across Canada quickly and effectively
Fast. Accurate. Cost-effective. For a free consultation, sample reports or more information about Verus Valuations, contact us at 877.463.8241 or info@verusvaluations.com.
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