Rob Misheloff
Unlocking the value of your equipment through cash-out refinancing can be a game-changer for your business.
Robert Jackson and Rob Misheloff bring their insight and wisdom to the world of cash-out refinancing.
Whether you need extra capital to expand your operations or streamline cash flow, tune in to discover how to leverage your existing assets for financial growth and stability.
Don't miss this deep dive into making your equipment work harder for your business.
Transcript
Welcome to another episode of the Smarter Equipment Finance podcast.
I'm Rob Misheloff, and this is Robert Jackson.
Today, we're diving into the world of equipment, cash out, refinancing.
It's like having your cake and eating it too. We're gonna talk about how this magic trick works and whether or not it's the right move for your business.
So first of all, let's let's understand it with a clear definition of what cash out refinancing is when it comes to equipment.
Robert Mhmm.
You've done a lot of these Mhmm. Transactions. Can we start with a clear definition of what equipment cash out refinancing is and how it's different than other lending or leasing options.
Okay.
I'm glad you asked that question.
The way that a cash out refi pro refinance program works is if a business owner has assets, construction equipment, or anything that has, you know, value offers value to a prospective underwriter, And they're tied up with cash. And they need to get cash, but they don't wanna surrender their equipment. Well, they have the ability to use that equipment that is typically paid off. We can't really do it if it's got a lien.
So that's one of the things that you've gotta be I know that it's gotta be free and clear. I fit's a title piece of equipment, no liens. If it's non titled, we just have to show that you don't have any, you don't owe any outstanding balance on it through other means. But we can do titled or non titled, so it does not matter.
It just needs to be under your business name or your personal name if you're a sole-proprietorship.
In that case, what we can do is we will actually use the wholesale value of the equipment in some cases and find out what we can get you for that piece of equipment. Most recently, I had a gentleman who contacted me about a skid steer. He had a skid steer that he needed to get forty thousand dollars out of, to pay for some marketing costs and an expansion on his, powder coating business.
K.
And, we were able to get him about thirty five grand, of what he wanted, which was fine. It was he was he was more than happy to get that. But not only did he get the thirty five thousand, he kept the skid steer. So he got to use the equipment and just pay it back like it would be a traditional loan on any other on any other structure. So it's no different than just kinda like refinancing your house.
So let let's back up a second on that. I'm curious.
The equipment, he was able to get thirty five thousand Mhmm.
As a cash out.
Mhmm.
What was the wholesale value and what was the retail value of the asset he actually put up for collateral?
That, I don't know. But I know that when he bought it brand new, it was sixty 8000. Okay. So I was basing it off of that figure, and it was three years old, I believe, or something to that effect.
Okay.
But he, he had just run into some some money issues. He didn't wanna take out a working capital loan because he thought that those rates were too high. Sure. So he came to me and and then I proposed this, and it was it was a perfect fit for him.
I've also done instances where I had a gentleman come to me where he needed to get some money on his dump truck. He had a paid off tri-axle Peterbuilt dump truck, and he needed to get eighty grand. And we got him about eighty grand because it was a really good truck. It was a high quality, low miles, well maintained truck.
So Interesting.
So let's let's talk about what assets are eligible because I I've had some people, come tome in the past with assets that nobody nobody would lend on. Right? It it has to be some sort of hard asset.
Mhmm.
And so that could anything with a title Mhmm. Is is typically going to qualify. Right?
Mhmm.
Any sort of yellow iron.
Mhmm. What about machine tools? Machine tools, I don't know, to be perfectly honest with you.
Okay.
I I don't wanna speak on something that I don't know because I'm not, I'm not really deaf in that kinda machine tools. But, if I with the cash out refi programs, it has to be a substantive asset. It has to be an asset that if they take it, if they repossess it, because God forbid that should happen, but let's be honest, you know, that does happen from time to time. They've got to be able to resell it. So if you get machine tools, who are they gonna resell them to? I mean Right.
In fact, I'll give you an example of transaction, I was asked to work on, a while back that did not qualify. And it it was for, an auto mechanic, and he wanted to refinance his toolbox, his wrenches, his drills, and and so forth. And, I mean, what are you gonna do with a a wrench? It costs more to repo a wrench than you're gonna get for selling it.
So, typically, one of the main considerations is the value of each individual asset. Right?Correct. And and a lot of times and it depends on, the investor or the or the financing source.
But some some say there's a minimum asset value of ten thousand dollars.
Yep.
And that can't be two five thousand dollar assets. It It needs to be everything has and depending on depending on who's lending the money, they may go by the wholesale value, some go by the auction value. Mhmm.
But some have a minimum of ten, some have a minimum of of twenty, but no one's going togo to the trouble of writing cash out refinance on well, number one, soft assets that that Or software or anything like that. It's just Right.
Software, racks, anything without a serial number.
Correct.
And I I typically, I tell people to think of a hippopotamus.
It has to weigh at least as much of it. A hippopotamus weighs six thousand pounds.
If you are trying to refinance something that doesn't weigh as much as a hippopotamus, you're not going to be able to to make that transaction work. Typically, it it's something that's made out of steel, something that's heavy.
You know, for most of our customers is is is not a problem. We're usually looking at a crane or a cement mixer or a semi truck or or or something of that order. Let's break down what are the steps involved in this transaction from the initial application through funding? How does how does it actually work?
Well, for a title deal versus a non title deal, it's a different process. A tie a non title deal is gonna be much quicker.
Sometimes the clients can have the funds in their bank account in as little as forty eight hours.
K.
But with a title deal, because there's certain processes that we have to go through and certain processes that our underwriters have to go through, it does take a few, a few more days, but it doesn't really take much, to be honest with you.
A simple application, the asset, we need to get, pictures of it.
All the pictures serial number, hour meter each side.
It's called an equipment condition report or a vehicle condition report, however you wanna call it. We also have to get proof of ownership. So if it's a non titled piece of equipment, an insurance declarations page with the item posted on it will suffice. Sometimes if you have the original bill of sale for when you purchased it, that would work. Or if you have, a payoff letter or lien release from whoever was financing it with the serial number posted saying-that it's free, that would also suffice. So there's a number of ways that we can prove that you that that that the equipment is owned by you and it's free and clear.
K.
But those are typically done with non title deals. Non title deals also yield better financing rates for some reason.
I don't know why. At least in my particular circumstances, I got a better deal on the skid steer than I did on the the dump truck. And, the customers were nearly identical, so I don't know why.
But it's not for me to decide.
So there's there's pros and there's cons to this.
The pro is that you keep your equipment and you get your, and you get your money. The con is that you gotta pay it back with interest. Right. So there's a price to pay, and that's the price you pay.
So what are the pros and cons of this sort of transaction, a cash out refinance, versus just going and getting either, and let's talk about two different examples, because you have your traditional term loans that you get, primarily from banks because they're very rare in the nonbank marketplace.
Mhmm.
And then let's compare it also to, your typical working capital loan that you get from a nonbank lender.
Okay. So a a traditional working capital loan, that you would get from a nonbank lender, it were they're kind of a a short term solution for for, for immediate cash infusion.
If if you're needing something, if you've got money coming to you in the next sixty to ninety days, maybe a hundred and twenty days, something like that, then a then a working capital loan is the absolute best fit for you. Because those terms are generally six months to fifteen or eighteen months.
K.
Not not much longer.
Right.
So if you're borrowing fifty thousand dollars and you're paying it back over a shorter term, you can imagine what your payments are gonna be like. Right.
Moreover, the interest rates on working capital loans tend to be a little bit higher. They're more akin to, credit card rates, just is what it is. Right.
It's an open secret.
So anybody out there listening and knowing, it just is what it is. So Yeah.
I mean Yeah.
I mean, those loans, we're pretty clear with our we we do a very, very, very small amount of them.
Mhmm.
We could do more if we liked to lie to people, but that's just not something we do.
And we're we're transparent with people about the rates and the terms. Mhmm. And that it's usually not a very good idea to to take out this this type of a loan unless you're gonna be able to pay it back in, you know, x amount of time.
And to be clear, typically, these cash out refis are not a short term solution like a working capital loan. They can go up.
What what's the law the longest they're they're they're completely dichotomous.
You can get a you can get a cash out refi program and get a sixty month term in some instances if you're qualified enough. It's all based on the time in business, the credit, commercial credit, and the asset.
The better those circumstances are, the better deal we can offer.
Gotcha. So, it it is almost like a bank term loan except just you're putting up collateral.
Yes. Well, we have we have them where you can do term loans, but we also have a program where it has an early buyout option k. Where at some point during the agreement, once you reach that milestone, if you've achieved, you know, the criteria to get to it, never miss your payments, always on time, set up as an ACH.
There's a little, privilege, I guess, you should say or a a bonus for the the the, the buyer, the guy that took the cash out refi, where if he would like to mitigate some of the finance cost and, like, a term loan where you're fixed payment for a fixed term, so you're obligated topay the fine the the interest and the principal.
Right.
This will allow you to soften that blow somewhat. So you'll still pay some finance cost because nobody does anything for free. You don't I don't nobody.
Right.
But you'll be able to, it'll put you in a much more favorable position because your payments are gonna be much lower, than they would be on on, say, a working capital loan where you have a shorter term for the same amount of money. Because if you took a fifty thousand dollar cash into your bank account and you had sixty months to pay it back versus fifteen months to pay it back Yeah. It it's it's there's no question which one would be better, especially because the the, cash out refi program is is is gonna be way more conducive because it's treated just like a it's treated just like an equipment loan, but it doesn't report.It's not gonna report to a commercial credit because it's not actually a, an asset, you know, kind of thing.
So Sure.
Sure. So that that's actually a a pretty good deal because you avoid the high charges of a working capital loan, but you do have the ability in many cases, not all, but in many cases to pay it off early Mhmm.
And save the majority of finance charges Mhmm.
If you so choose and if you're in in the proper cash position to do that. Correct. That sounds like a pretty good deal.
Mhmm.
Yeah.
So let's talk about, we we talked about one example.
I actually had a customer, this is many years ago, who was overloaded with working capital loans, and he was about to go bankrupt.
And, I he was what's what's called stacked. And in working capital stacking is when you have multiple working capital loans, which can be a death spiral. Because what happens is most working capital lenders will put you into a loan.
They don't call it a loan. They call it something else. But but it but it's a loan.
And the payments will be targeted at about ten percent of your revenues.
Well, then you get a second loan, that's ten percent of your revenues.
Well, then you get a third loan, that's ten percent of your revenues. Well, for most businesses, thirty percent of your revenues is all of your profit, if not more. Right?
And so once you get into that position, it's very hard to get yourself out.
And in this particular case, it was a trucking company. The guy the guy had, I think twenty trucks.
And he was not going to make it. And we realized, well, we can put these trucks up as collateral, do a cash out refinance on the trucks, drop your payments, and we ended up dropping his payments by seventy percent Mhmm. Because these working capital loans were all structured as ninety to a hundred and twenty days, which, of course, meant they had to keep coming back for more and more capital.
We rolled it all in to, a cash out refi with a thirty six month term, and the customer was able to pay off all his working capital loans, get out of that, and essentially save his business.
So in a lot of cases, this loan can be an absolute lifesaver.
If we're having if if a client is comparing the two programs side by side and they want my input, I would tell them to go for the cash out refi program if they qualify every time because it's just a better scenario overall for the business owner. That's that's the easiest way to explain it.
In ten years, I've personally done, well, dozens and dozens of transactions, in one or two working capital loans.
I'm more much more likely to talk somebody out Yeah. Of a working capital loan, even though it costs us money to talk somebody out of a working capital loan most of the time.
It does.
But, there's some to be said for not ripping people off or or not. And then and and to be clear, not it's not always a rip off, obviously. I mean, we we do a few of them, but we're very clear with customers when we're talking about the straight working capital product that it it has its place just like, and I'll give you an example, is every dentist office has access to cocaine.
It's used to make Novocaine, I think.
But I I do know that in the dentist office, there are substances that can be abused.
They're there for a good reason, and they're used in very limited, instances when they're needed, but it's a good way to ruin your life I just talked to you.
If you use it wrong. Right? And and that's what I think about the working capital loans.There's a there's a time and a place for them, but you wanna be very, very careful because they absolutely can destroy your business in terms of and and that's true incidentally of any loan.
So it's kind of akin to having, like, nitrous oxide at the dentist is okay, but nitrous oxide at a funeral wouldn't be.
Right. Yeah. Pretty much.
Alright. So I'll make sure we're clear on that. That's okay. So so what you're saying is that for those that are work doing the working capital, we make sure that they're understand what they're doing so they move forward with their eyes wide open. Is that what you're telling me?
Right. And we we also wanna do the same with a cash out refi because every every product has its pros Mhmm. And and its cons, and you wanna make sure it's used in, the most responsible way possible and that our customers are making an informed business decision. And so let's talk about two. What are the pitfalls of a cash out refi? And the first one that comes to mind is, well, if you don't make your payments, we're gonna take youre quipment.
That's number one.
What else is there?
Well, some people can object to, to the interest rates just on a general basis because, you know, when when people call what's your rate, what were you expecting? What were you you know, that kind of thing. Everybody wants the lowest rate. Everybody wants a one point nine in it. Everybody wants a three point nine nine. Those don't exist anymore.
Right.
I don't know what rate the customer is gonna get because like I said, each case is different.We don't have a one size fits all type of approach with it when it comes to those cash out refi programs. Like I said, we're not we're not pigeonholed to one program. We've got a couple of different ways that we can position the deal on those cash out refi programs. So we're not just you know, we've got we've got plenty of options that we can present to customers.
But sometimes those options that customers object to because of, you know, it's out of their it's out of their funding parameters or whatever the case may be. So that would be the biggest downside is it just doesn't fit with what their budget because people's expectations always don't match with reality.
I've got one more for you because this is something I I I haven't encountered in the past, is arguing with the lender about the valuations of their equipment. And it will depend on some we we talked about earlier.
So some some lenders look at the wholesale value, which is very different than the auction value Mhmm.
Which is what other lenders look look at. And the auction value is what would what would it go for at an auction? Mhmm. And a lot of times and I'll I'll give you an example.
This is, a number of years ago, a gentleman came to me. He wanted to do a cash out refi on a moving truck.
Mhmm.
And, we looked at, Black Book, which is where you can get a lot of, valuations for trucking acts assets.
And we determined that the, the truck was gonna be worth about, fifteen thousand dollars or something like that. And the customer got very angry. And he said, well, no. That doesn't take into account the lift gate on the truck. And I just put a new lift gate on the truck, and the lift gate itself was twelve thousand dollars.
Wow. I didn't know they're that expensive.
I didn't either. But the truth is, the auction market is the auction market. It doesn't necessarily care that you stuck a lift gate on the truck. You look at what and what a lender looks at is what are the comps? What is this model of truck with this amount of miles typically going for at auction?
And it's gonna be very difficult to take into account every variable such as the guy just put a new lift gate Right.
On it.
Or I just put new tires or I just changed the brakes. That's just maintenance.
Right. If if you if you talk to somebody in the commercial lending industry or, in the residential lending industry, they'll have people call and they'll they'll have put new carpet in their house.
Mhmm.
And based on that, they'll decide the house is worth Ten thousand dollars more.
Exactly. Exactly. And this is the the the same sort of thing where it doesn't really matter what you think somebody would pay for the asset. It matters what the market shows people have already paid for the asset. And we can only go based on actual figures of actual transactions that have taken place. And so a lot of people will turn down a transaction because of an unrealistic view of the value of their equipment.
And the truth is, buying four or five trucks as, of course, a business makes you a lot less of an expert than a lender that has six thousand trucks in their portfolio and has math and has statistics to tell you this is what this asset goes for. And in fact, we know because the last time we had to repo a truck, we had to sell it, and this is what it sold for.
And based on that, this is how much money we're willing to lend on, and there's no emotion involved in that. And, a lot of times, emotion or attachment, because it's it's quite common to get a attachment to your your business assets or business vehicles.
You don't want that to keep you from making a solid decision about your business because you have pride about your truck.
You're emotionally attached to something you shouldn't be.
That's correct. That that's absolutely correct. Closing thoughts.
Mhmm.
Before we wrap up, equipment cash out refinancing is a powerful tool, but it's it's not a one size fits all. I mean, you have to assess your business's unique needs and risks before you dive in.
Anything else in terms of a a parting thought?
I would say if you wanna know what your specific situation would be to, pick up the phone, call Smarter Equipment Finance, and speak to myself or any other competent rep that we have, with an organization, and they'll guide you for what's best. And if cash out refi program is not what's best for you, if it's not gonna fit, for you, then we're gonna tell you that, and we're gonna tell you the reasons why. Because our job is to tell you what you need to hear, not what you wanna hear because you've been told what you needed. You've because if you're told what you need to hear, you can actually accomplish something. If you're told what you wanna hear, they're just lip service. It's just to to to move you along.
And so I I urge everybody to I automatically assume that when I talk to a customer that they're gonna speak to somebody else that does what I do. And if they don't, they're a fool.Right. They're just a fool.
Right. So, on that note, with, with with cash out refi, it's a wonderful program that will allow you to keep your assets, get cash, make payments, stay in business, continue to scale your business. It's just it's a wonderful program. The people that I've done it for love it.
They have they've got no objections to it whatsoever.
I just wish I could do more of them.
Awesome. Well, with that, thank you. You're welcome. Mr. Jackson.
Thank you, Mr. Misheloff.
And, that's a wrap.