It is no surprise that the high prices of cranes lead most potential buyers to seek finance, but is everyone going for the same product? In an article originally published in Cranes Today, Sotiris Kanaris, former Leasing Life reporter, and deputy editor of Cranes Today and Hoist, investigates.

Apart from identifying the crane with the right characteristics, during the buying process a fleet owner has to make an important financial decision.

“Fleet owners take a lot of time making sure they get the right crane to meet their needs, but it is equally important to find a partner from a finance standpoint that is going to be with them throughout the cycles,” says Jeffrey Gocken, vice-president and global programme manager at DLL.

A number of bank asset finance divisions, independent funders and captive finance companies are operating in the crane finance market, as cranes’ strong residual values make them a relatively secure asset.

John Crum, senior vice-president and national sales manager of the construction group at Wells Fargo Equipment Finance, says: “Cranes tend to hold their value on the top end of the charts for all equipment types. Even in volatile periods where there might have been swings to the low side, they were not as dramatic as other asset classes.”
This makes finance companies interested in including cranes in their portfolio.

Eric Freeman, vice-president of Summit Funding Group, says the crane industry is the best place for a finance company to put its money if it is starting to go down-market in credit profiles.

He adds that cranes are great collateral, because there are few technological advances and they do not involve a great amount of moving parts. The high residual values mean that in the event of default in payments by a borrower, the lender can repossess and resell it at a relatively high price.

There is high availability of capital to finance cranes, and fleet owners have the ability to choose from a wide range of financial products, including leases, loans and hire purchase.

Each company’s business strategy is different, therefore there is not a single finance product that meets the needs of all companies. However, it is interesting to note the existence of geographical differences in finance product choices.

Manitowoc Finance and Wells Fargo Equipment Finance, for example, find that in the US market demand is highest for loans.

Crum says: “The fixed-rate term loan has been the most popular finance product in the US for many years. This is because the rates are very attractive; five- to seven-year rates are very low at the moment.

“For the general end users or crane-rental companies, a five- to seven-year term tends to match their cashflows, utilisations and expected returns. They are able to pay for the crane at a reasonable time and continue to build up some equity while not overstressing their cashflows for it.”

Gocken says loans and finance leases are popular in the US because the idea of ownership is more prevalent than operating leases. “Cranes are intrinsically very valuable and have a long useful life, which makes ownership desirable.”

When a finance lease agreement is reached, the lessor buys the crane and rents it to the user for an agreed period. The lessor retains ownership, but the crane user has exclusive use of the asset. Depending on the agreement, the crane user may be able buy, or continue leasing, the asset.

Summit Funding Group finds companies with low debt, particularly those adding a couple of cranes to their fleet every year, are seeking the cheapest loan available. On the other hand, its clients which have to accomplish certain financial targets to keep stakeholders happy go for an operating lease with a fixed purchase option.

“What they get to do in that scenario, they bring the crane in without adding debt to the company, and at the end of the lease term they can either hand it back, buy it for a fair market value, or keep leasing it,” Freeman says.

David Pengelly, vice-president of Global Trade Finance at Manitowoc, says while the company provides loans in Western and Eastern Europe, leasing is more prevalent in these regions, as it is “more of a rental market”.

“In Europe and China the focus is on usership rather than ownership. Customers are looking for the ability to update their rental fleets rather easily by just handing the cranes back and re-leasing new cranes. It is more similar to the forklift industry,” Pengelly explains.

As the UK construction market has bounced back in the last couple of years, demand for crane finance has increased. Lombard, NatWest’s UK asset finance division, saw a 42% year-on-year increase in the value of crane finance in 2015, and a 56% increase in the number of cranes financed in the same period.

Mark Treacy, sales director at Lombard, says the majority of its customers are funding cranes via hire purchase, which gives companies the certainty of fixed costs for the duration of the agreement, and the option to buy the vehicle at the end.

“I think it has always been a dominant product in the asset finance industry. Ninety-five percent of the cranes we have financed in the last two years have been on hire purchase, and that is across the spectrum of our wide customer base, from the small sole trader through to large corporates,” says Treacy.

Treacy adds that there are various benefits from using hire purchase and asset finance in general, in terms of releasing cash and having an additional credit line to normal bank funding lines.

“It can be completed very quickly; the security is actually the asset itself, so you don’t need any other security.
“It is a fixed cost so you know right at the outset how much you have to pay on a monthly basis, which takes away the uncertainty,” he adds.

Hire purchase is also the most popular crane finance product at Hitachi Capital UK, which focuses on SME lending.
“A lot of the SME crane owners like to own the asset at the end of the term, especially since the crane has such a long life span, it can last for 20-25 years,” says Andy Taylor, head of sales at Hitachi Capital.

The risks associated with ownership can be minimized through an operating lease facility, but only a small minority of UK crane fleet owners choose this product.

NMT Crane Hire, a Lombard customer, expanded its fleet from six cranes in 1990 to 45 in 2016.

“We expanded at the beginning because we were using our own cash to buy the cranes, and then we used finance to expand quicker,” says Mark Ambridge, managing director at NMT Crane Hire.

The company initially made a couple of lease purchases, but then selected hire purchase, which it has been using since.
“I like fixed rates and the crane is ours at the end of the day. I like to know the exact amount going out each month, it is much better than going variable. I wouldn’t lease anymore,” says Ambridge.

This year NMT Crane Hire added to its fleet a Terex Challenger 3180, a Terex AC40/2L, a Terex AC100/4/(L) and a Liebherr LTC 1050 telescopic compact crane, using hire purchase.

The Dutch crane market has shown signs of growth, but the economic crisis has changed the owners’ business strategy. Nick Hendrix, equipment specialist at ABN Amro Lease Netherlands, says when a smaller fleet demands a specific crane, they tend to hire rather than purchase.

“They are operating with more flexibility than ten years ago, when the market was expanding and every company wanted to put their asset on their balance; now you see more rental,” he explains.

At ABN Amro Lease Netherlands the most-demanded crane finance product is a finance lease, with or without a balloon payment.

“We do finance lease most of the time for crawler cranes, because they are robust assets which can be financed for a longer term, seven to ten years, or in some cases more than ten years. Operational lease is mostly used for all- and rough-terrain cranes,” explains Hendrix.

He adds that many corporate customers which obtain finance for crawler cranes rent them to companies in other countries.

Hire purchase accounts for 90% of all the financing contracts of Terex Financial Systems in Germany, according to its EMEA sales director Stuart McDowall. He says demand for crane financing is high in Europe, and that there are differences in the way each country defines their calculation methods and requirements.

He explains: “For example, in France, the full amount is financed, and customers would usually buy the crane at the end of the leasing period for a very small percentage of the residual value.

“In Benelux and Spain, down-payment can be requested and some customers may ask for a balloon payment in order to reduce the monthly payments. But funders in many other countries within Europe will look for a minimum of 10% down-payment, and will often consider a VAT deferral to coincide with the customers’ VAT returns,” he continues.
A balloon payment is a repayment of the outstanding principal sum made at the end of a loan or lease period.

Finance lease is also the dominant product in China. “The most popular finance product is finance lease, accounting for about 95% of the total lease portfolio. Such a lease-to-own structure coincides with the asset ownership culture,” says Fong-Kiat Phua, general manager at Manitowoc Credit (China) Leasing.

Phua says the usual lease term ranges from three to five years, built-in with a balloon payment of 30% for certain bigger-ticket items. This is lower than in the US and Europe, where the typical range stands between five and seven years.
Phua adds that there has been an increase in crane finance in China since 2010, but demand for new crane finance has not been strong in the last few years due to a much lower volume of new sales.

“However, the awareness of crane finance has never been so wide and so deep, making it a reliable alternative source of finance,” Phua concludes.

What funders look for in crane lessees

Finance companies are offering a wide range of options to potential crane owners, but they have a number of requirements. All the interviewees quoted in this article mention that their companies look “beyond the numbers” when it comes to assessing a customer.

“While a customer’s financial position is important, we also take other factors into consideration when preparing a tailored package,” says McDowall.

Describing the standard underwriting process at Lombard, Treacy says it looks into sets of accounts, projections, budget, length of trading, knowledge of the individual running the business, and other general underwriting information.

Hendrix says ABN Amro Lease also considers the asset: “We look very closely the asset itself, the brand, type, version, additional equipment, how the company wants to use this asset, and which industry the company operates in. We would like, and need to know, every aspect to have the best financial solution for both parties.”

Gocken says the financier’s knowledge of the qualitative side of a business helps build the foundation of a beneficial long-term relationship with a customer.

“You can look at all of the quantitative aspects and make an assessment, but I think when you go a bit beyond that, you can get a better understanding of who it is that you’re working with. If you know the people in charge and know their commitment, you are likely to provide more flexibility, particularly when that company needs it most.”

Falling rates, shrinking margins

Competition in the crane finance market is high as a number of players have returned to the market after the economic recovery.

Gocken says: “Globally there is almost a cyclical flow of entrants into the marketplace. In the US, it is more that banks are constantly in and out of the market. At times they are very aggressive in the crane market, while at other times they completely back away.”

Rates in the market have dropped over the last few years, which is beneficial for those seeking finance.
Lombard’s Treacy says the difference in rates is due to the lower cost of funds.

“Cost of funds, being where they are with the base rate being so low, has meant that the rate for the customers has been competitive all around,” Treacy notes.

Gocken adds that because the crane market is relatively small, finance companies are fighting over the same customers, and this puts pressure on margins.

Freeman continues: “Let’s say a very small crane operator or rental company – with a $10m revenue, barely profitable – is looking for finance. If it is a nice steady little credit we will be competing against local as well as large international banks for this customer – bidding against each other to give them money at 3%. It is a crazy market now as to how low the rates have gotten.”

Wells Fargo’s Crum identifies competition as a challenge. “There is a lot of capital available in the market, so our challenge is competition and in making sure that we are there with the right product at the right time. Our number-one challenge is the abundance of capital and the rate environment we are in,” he says.

Taylor shares this opinion, explaining: “We deal with brokers, and our brokers have many choices of where they can place that business.

“Some of our competitors offer cheaper rates than us; some of them will have more adventurous credit policies than us. However we’re at the forefront for our turnaround times and the service we provide.”


Manitowoc Finance’s Pengelly speaks about the challenges experienced by finance providers resulting from a downturn in the US market: “We have to manage customer delinquencies better, and we entertain restructuring to help customers in rough times as a result of the current marketplace,” he says.

Across the pond, the Brexit result has created an uncertain economic environment, affecting investment.

Taylor says: “I think a lot of SMEs, leading up to the Brexit vote, put purchase plans on hold as they were not sure what was going to happen.

“The result was unexpected for many SMEs owners, so again they are waiting to see how things will go before they make a purchase.

“For an SME, an asset of this value is a big commitment, so they have to be sure that the economic conditions and climate are right for that purchase.”

Another issue faced by UK finance providers is low awareness of asset finance; this was highlighted by both Lombard and Hitachi Capital.

Certain characteristics of some types of crane can pose challenges to finance providers. Fraud can occur in tower crane finance, because they consist of multiple parts that can be replaced.

Terex’s McDowall says: “Business banks like to finance mobile cranes, but tower cranes are somehow perceived differently by banks. Consequently, our customers still face some reluctance from funders to secure financing for these products. Fortunately we can help them.”

ABN Amro Lease Netherlands has seen an increase in demand for tower crane finance, which it is predominantly financing through finance leasing. However, in order to prevent loss, the bank insists there will be an identity to each part of the tower crane, and a track-and-trace administration.

Hendrix says: “Each part should be identifiable by number and also by a track-and-trace system. This is an obligation of the client, one of the terms and conditions we set up before financing a tower crane.

“It is also a challenge, because in the crane business our customer is not used to it, but there were some incidents of non-traceable assets in the past, so we had to act,” Hendrix continues.

Another issue for finance companies arises from the fact that cranes are a relatively expensive asset to remarket. Taylor adds that remarketing can be also pose difficulties, as some cranes are more specialised for particular applications.
Summit Funding Group’s Freeman explains that in the US, many cranes have been pushed into the secondary market from oil field areas such as Texas, Oklahoma and Louisiana, as an effect of the falling price of oil.

“We have seen a lot of big crane companies either going under or trying to sell some of their fleet, and values going down in those areas, but it has been quite regional. Some of them need to be reconfigured to work outside the oil field, because they have certain specialised features.”

However, Freeman adds that because the recession related to the oil price decline in the US is regional, these cranes do get sold in other regions.

“It is not like in 2008-2009 where the whole world was in recession, so there was nowhere to go with them. We have seen a small dip in crane values in the last six to 12 months, but it seems to be recovering,” says Freeman.

Despite the challenges, finance companies have illustrated that they are particularly interested in the crane market.
The availability of finance products gives crane owners the opportunity to find one that matches their long-term strategy and contributes to their expansion.