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TABLEOFCONTENTS About Wells Fargo Equipment Finance

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How to present your company for financing

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Managing cash flow

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Lease versus loan

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By Matt Hotchkiss

By Matt Hotchkiss

By Matt Hotchkiss

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About Wells Fargo Equipment Finance Comprehensive finance and lease strategies for the bus and transit industries. We offer financing designed specifically for businesses in the transit industry, including charter and tour service providers, transit contractors, schools, municipalities, and bus and motorcoach manufacturers and distributors. We can provide: • F inancing and refinancing of new and used equipment • S easonal and skip payment structures •C  ompetitive fixed or floating interest rates • L ease purchase agreements • S tandard and modified TRAC leases • Operating leases • Municipal leases • Application-only programs • Dealer retail finance programs • Interim financing • Manufacturer subsidy programs Call us at 1-866-726-4714 or request a contact from our equipment finance professionals.

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How to present your company for financing By Matt Hotchkiss This is undoubtedly the most common topic that is discussed in the many trade publication articles and tradeshow panel discussions I have been a part of in my years as a lender to the motorcoach industry. The topic deserves its popularity because financing in a capital intensive business like ours is critical to the success of a company. The difference between competitive financing and financing with a higher risk/higher rate type lender may result in interest costs that can be tens of thousands of dollars higher. Above all, I will emphasize the importance of presenting your company professionally and with as much detail as possible. Let’s start by identifying a quick hit list of what a lender generally looks for to approve motorcoach financing. Typically, lenders will want the following: 1) Credit application 2) Last two year-end financial statements / tax returns on the company 3) Most recent interim financial statements with a comparative statement for the prior year (this allows us to monitor trends and understand seasonality in the business) 4) Last two year’s tax returns on the owners/guarantors of the company 5) Current personal financial statement on the owners/guarantors 6) Current fleet list, preferably with corresponding debt Next I will expand on a few specific areas surrounding the application process and help you understand how things look from the lender’s side of the table. Tell us your story Credit underwriters typically have to complete a fairly detailed write up on a deal and the rationale for approving it. A key component of that write-up centers on what their customer does and why they are buying equipment. Helpful information includes: • The transportation business the company focuses on (i.e. charter, line-run, tour, contract) • Who your major customers are, how long you’ve been doing business with them, and what percent of company revenue they represent • Who you have contracts with, how long you have you been doing business, how long the contract is for, and the annual revenue derived from them. A copy of these contracts is always helpful. • Your reason for buying a coach and whether it is an addition or replacement to the fleet Provide quality financial information I have always encouraged customers to consider hiring an external accounting firm to provide reviewed (or audited for larger companies) financial statements on their company. Credit people appreciate reviewed statements because they provide instant credibility to the information they are looking at, whereas poorly prepared internal statements can often raise more questions than answers. A CPA review provides detailed information on the results of the company that have been validated by an external firm. For the borrower, this provides a system of checks and balances on the company and can help identify irregularities or exceptions that you may not catch otherwise. 4

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A good CPA can also be an excellent advisor on your business. Explain the results If you had a down year (or an exceptional one) provide commentary with the statements that speak to what’s going on with the business. Many companies provide a one page letter with financial statements that detail results and specific expense or revenue items that vary from the prior year. To a credit underwriter, this shows that you are dialed in to what’s going on with the business and are proactively taking action when needed. Be professional Working with a lender should be considered a long-term relationship that goes on well after the deal is signed. If a lender has questions on your business or financial statements, take the time to provide detailed answers. One word answers to important questions are often an immediate red flag that a borrower may not be interested in the relationship. An occasion may arise where you and your lender will have to work through some difficult issues together and a good relationship is crucial. Personal information Most coach companies are family-owned businesses where the owner is critical to the success of a business. An owner is often able to provide the necessary financial support to weather the storm when a business struggles. The ability to evaluate the strength of company owners can often counter weaker financial results. Although not the most exciting aspect of the motorcoach business, financing is important and likely represents one of your larger expenses. Providing a complete presentation of your company can pay dividends in the type of financing you are able to secure. Finally, take the time to invest in a relationship with lenders that want to grow with your company. The consummation of a deal is just the beginning and you need to be confident in the lender’s ability to take care of you through the life of the relationship. Matt Hotchkiss serves as senior vice president for Wells Fargo Equipment Finance, Minneapolis, MN. Wells Fargo Equipment Finance offers financing designed specifically for businesses in the transit industry, including charter and tour service providers, transit contractors, schools, municipalities, and bus and motorcoach manufacturers and distributors. Reach Matt at 800-322-6220 x74129 or at matt.e.hotchkiss@wellsfargo.com. Visit Wells Fargo Equipment Finance online at www.wellsfargo.com/motorcoach.

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Managing cash flow By Matt Hotchkiss The importance of cash flow When appraising a business, there are a number of metrics that lenders will review as they consider financing for your company. Some of these metrics include revenue growth, leverage, profitability and tangible net worth – but the metric that stands out above all others is cash flow. Cash flow is the ability of a company to generate enough cash to meet its debt obligations. In simple form, cash generation (net income + depreciation/amortization) should be enough to cover the principal portion of the company’s debt obligations during the time period being measured. Business owners should have a firm handle on their respective company’s cash flow in order to keep it running smoothly. Cash flow problems can be the leading cause of failure for businesses. It’s a good business practice to take time to track cash flow on at least a quarterly basis if not more frequently. Too often I see business owners base the health of their company on a positive net income, a growing revenue number, or sometimes on EBITDA growth. These can all be positive factors in a business, however; if the increase in debt obligations is outpacing cash contributors, the net result will negatively impact the company. Cash flow measures the cash generated from the operations of the business and compares that to the principal amount due on the company’s debt. With cash flow as a numerator and debt as the denominator, the product is the cash flow ratio of your company:

Net Income + Depreciation/Amortization Current portion of long-term debt (CPLTD) and capitalized lease payments For example, if for every $1.00 of debt the company has they generate $1.20 of cash, then the company has a cash flow ratio of 1.20 to 1. Here are a few variables that may impact a cash flow measurement: Gains/Losses on sale of assets: If a company sold an asset in the current year that resulted in a gain on sale, that gain is included in the net income. Typically a gain is not recurring year-to-year and not considered part of operational cash flow, so the gain on sale would be a reduction in the cash flow (numerator) of the business. Similarly a loss on sale would typically be added back for the same reasons. Non-recurring expenses: Occasionally a company will have an extraordinary high legal expense or possibly transaction expenses related to the acquisition of a business. If these or other similar expenses are clearly non-recurring in nature, it’s reasonable to add them back when determining operational cash flow. Timing: The CPLTD on a balance sheet represents the principal payments due in the next 12 months. If the company added equipment late in the year, then using the current portion of debt is misleading because that debt didn’t have a chance to contribute revenue to the company. Therefore it’s reasonable to also look at the CPLTD from the prior year and maybe average those two debt numbers. Since balloons or residuals that are due in the current year are likely to be re-financed, they should be modified to reflect the new amortization. For example: 1/3 of the balloon amount should be included in the CPLTD if it’s being re-financed for 36 months, not the entire balloon.

Managing cash flow Cash flow will vary month to month or even week to week, depending on the business. Preparing for and managing a shortage of cash will help operators in the long-run. There are a variety of shortterm ways to compensate for a cash flow-shortage. These options may help you manage cash flow in the short term but should not be used as long-term solutions. Selling an asset: Raising cash by liquidating equipment Using a line of credit: A LOC should be used as a short-term solution to compensate for seasonality. Contributing cash: This could either be personally or from another business. Companies may also stretch Accounts Payable or compress Accounts Receivable days to collect, defer debt payments with a lender, or factor (sell) accounts receivable. All of these solutions are short-term fixes to a bigger problem, which is that the business is not generating positive cash flow from operations. Understanding cash flow is the first step to managing it. Don’t incur debt simply to increase revenues. At the end of the day, each dollar of debt service needs to contribute more than a dollar of cash flow for that investment to make business sense. If the business has seasonality, then plan for that by either scheduling debt payments to match the seasonality, using a line of credit during down months which is paid back during strong months, or simply conserving cash to cover weaker months. Three key items to keep in mind for effective cash-flow management: 1. U  nderstand your company’s cash flow and how to best to manage it for business success. 2. Be proactive by reviewing your cash flow on a regular basis. 3. W  hen cash flow challenges arise, have some quick fixes in place but focus on long-term solutions. Matt Hotchkiss serves as senior vice president for Wells Fargo Equipment Finance, Minneapolis, MN. Wells Fargo Equipment Finance offers financing designed specifically for businesses in the transit industry, including charter and tour service providers, transit contractors, schools, municipalities, and bus and motorcoach manufacturers and distributors. Reach Matt at 800-322-6220 x74129 or at matt.e.hotchkiss@wellsfargo.com. Visit Wells Fargo Equipment Finance online at www.wellsfargo.com/motorcoach.

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LEASE VERSUS LOAN By Matt Hotchkiss

loan TRAC Lease The motorcoach industry is capital intensive and most companies need to utilize financing when purchasing Year Depreciation Interest Total Lease Payments Difference equipment. Once that purchasing decision has been made, 1 $100,000 $21,290 $121,290 $77,520 $43,770 the next step is choosing what type of financing is most beneficial for your business; traditional loan financing or a 2 $160,000 $18,575 $178,575 $77,520 $101,055 lease finance product. 3 $96,000 $15,740 $111,740 $77,520 $34,220 Since loan financing is easily understood, I’ll focus 4 $57,600 $12,770 $70,370 $77,520 ($7,150) more on the various motivations and options for lease 5 $57,600 $9,665 $67,265 $77,520 ($10,255) financing before providing a summary comparison of the two. Companies may be interested in lease financing on 6 $28,800 $6,420 $35,220 $77,520 ($42,300) motorcoaches for any of the following reasons: 7 $0 $3,020 $3,020 $102,520 ($99,500) A) The company isn’t able to realize the benefits of (w/residual) accelerated depreciation. This could be because they Total Tax Write Off: $587,480 $567,640 have enough deprecation available already, they have limited taxable income, or they have net operating loss carryforwards. By transferring the depreciation benefit to the finance company, the company can realize cash flow savings percent, 19.2 percent, 11.52 percent, 11.52 percent and 5.76 percent (years 1-6). In addition to the depreciation, the owner can also write through lower interest rates on the financing. B) The company wants the asset to be off balance sheet. Off balance off the interest expense associated with that loan. On a TRAC lease, the lessee writes off 100 percent of their sheet financing can strengthen a balance sheet, improve financial ratios, and may keep a company in compliance with bank covenants. lease payments. To illustrate the tax differences on a TRAC lease versus a loan, let’s C) The company wants the use of the assets for a stated period and then wants to return them. This may appropriate for a contract with assume a $500,000 motorcoach is financed over 84 months. We’ll add a 5 percent balloon/residual for a simple comparison. a specified term, or if residual values of equipment are a concern. As this example demonstrates the write off between a TRAC lease Although not a comprehensive list, the main lease products available in the coach market are the following. Each product references the factors and loan is slightly more for a loan over the term of the financing, however the timing varies. A loan accelerates the write off in the earlier in play from the section above. part of the term whereas the lease is consistent through the term. The 1) T RAC lease. This is easily the most dominant form of leasing in difference between the two ($19,840) represents the cash flow savings our industry. TRAC stands for Terminal Rental Adjustment Clause on the TRAC lease as a result of a lower interest rate. A tax dollar saved today is worth more than a tax dollar saved and allows a company to have an option to purchase the coach for a pre-determined residual value at the inception of the lease. A TRAC tomorrow, so if you are still making taxable income after all write offs, lease is a capital lease for FASB purposes (shows up on your balance then loan financing is likely the best option for your company. Again sheet) but an operating lease for tax purposes (lease payments are this assumes you are not doing leasing for the reasons B and C earlier in this article. However, if you have enough write offs to shield your written off). [A] 2) Split (Modified) TRAC lease. This is similar to a TRAC lease but the taxable income, a TRAC lease allows you to save a significant amount responsibility for the residual value is shared between the company of cash over the term of the contract. Many companies utilize a mix of (lessee) and finance company (lessor). By sharing in the residual, the both to maximize the financing benefits. Your decision will require a careful analysis with a tax advisor. lease may qualify as off balance sheet for FASB purposes. [A,B] Leasing, in its various forms, can be a beneficial financing decision 3) Fair Market Value Lease (FMV). An FMV lease allows a company to return a vehicle at the end of the lease term or purchase it for the for your business. Choose a trusted lender to help you explore the fair market value at that time. FMV leases will have mileage caps and different options available so you can make the best decision for return conditions that a company must comply with or be subject your business. The information contained herein is general in nature and not to additional costs. Although a company is able to eliminate their financial obligation at lease termination they also give up the benefit intended to provide you with specific advice or recommendations. of any equity that may be present at end of term. Since a lessor is Contact your attorney, accountant, tax or other professional advisor taking the residual risk on an FMV lease, they are likely hoping for with regard to your individual situation. end of term equity. [C] Since TRAC lease financing is the most common lease in the coach Matt Hotchkiss serves as senior vice president for Wells Fargo Equipment Finance, Minneapolis, MN. Wells Fargo Equipment Finance offers financing industry the rest of this article will focus on a comparison of that to designed specifically for businesses in the transit industry, including charter traditional loan financing. For tax purposes, a loan allows the owner to and tour service providers, transit contractors, schools, municipalities, and bus write off depreciation in whatever form is currently available per IRS and motorcoach manufacturers and distributors. Reach Matt at 800-322-6220 guidelines. For the last three years, Bonus depreciation was allowed x74129 or at matt.e.hotchkiss@wellsfargo.com. Visit Wells Fargo Equipment but so far in 2015, MACRS is the accelerated method that is currently Finance online at www.wellsfargo.com/motorcoach. available. MACRS depreciation is used in six years at 20 percent, 32 6

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