Petrobanc Finance Blog

Gas station and convenience store owners seeking equipment financing for their operations should know these basic facts about equipment leasing to make the best decision for their business.

The advantage of equipment leasing is that it makes expensive items more affordable for the business owner, or lessee, and enables him to take advantage of tax laws that allow expensing of the equipment’s lease payment (faster depreciation, in essence, than with a purchase or traditional loan). The incredible flexibility of these leases can make equipment acquisitions much easier.

The equipment lender, or lessor, should be able to provide more attractive financing than a bank because he understands the secondary market of the equipment and know how to profitably dispose of the item at the end of the lease. The higher value the lessor expects for the equipment at the end of the lease subsidizes the payments for the lessee during the term. Until recently a lessee could return the equipment to the lessor at the end of the term with no penalties, and no questions asked.

Many of today’s “leases” though are barely leases at all, as far as the lessor is concerned. They make the structure of the lease so one-sided that virtually all of the risk, aside from collecting payments, is passed off to the lessee. Increasingly lessors are ratcheting down their risk as far as the anticipated value of the equipment at the end of the lease. What had been their forte — and what made some lessors more successful in a particular niche — is being replaced by lengthy verbiage.

This trend started when newer lessors began to compensate for lack of industry knowledge with contractual language that leveled the playing field. By doing so, they appeared to offer similar terms to the established firms — but the fine print revealed that the end-of-term options were far less accommodating to the lessee. The period of time that the lessee has to notify the lessor of their end-of-term decision (purchase, return, renew the lease, etc.) has shortened. The rules stipulating condition and location of the equipment and its peripherals (in one case, allegedly, even the box, packing and user’s manual) upon return became more onerous.

When considering an equipment lease, it is important to know the six main components of the transaction.
- Present value (the price of the equipment, less the down payment, trade-in, etc. (Do not deduct your advance payment[s])
- Monthly payment amount
- Number of payments
- Future value (the stated price you will pay at the end-of-term if you decide to buy the equipment, demand a specific dollar amount as opposed to a percentage)
- Interest rate. If you know the above factors, you can determine the interest rate. We can suggest this lease calculator to help with the calculation.
- Requirements for returning the equipment at the end of the lease. Make sure you completely understand the requirements, and that you believe them to be reasonable. If there is a penalty to return the equipment, it should be included in the future value number of the interest rate equation.

A fair lease should have a specific dollar amount buyout, a reasonable return option, a stated renewal rate with short term, and a reasonable period of time for the lessee to notify the lessor. Be wary of unusual or unnecessary terms. Some leases require additional insurance coverage, for example.

Above all, read the contract carefully before you sign. Our viewpoint is, if the document is too long for the average layman, or worded in such a fashion that it’s difficult to understand, it is probably not worth signing.

Keep in mind that it’s to the benefit of the lessor if the lessee forgets to advise of their end-of-lease choice within the stipulated notification period. The lessor can then continue to bill the customer indefinitely.

Equipment leasing is most suitable for relatively low-cost, high tech items that will become obsolete and may need to be replaced on a regular basis. Leasing “big ticket” items, such as pumps, tanks and canopies, may have a significant impact on the gas station or convenience store owner’s ability to get a commercial loan or mortgage at a later date.

Author: Ted Smith

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If you’re an independent gas station owner/operator, finding financing means you have to go looking for it.  Traditionally, banks and other lenders haven’t come looking for you.

This is not because lenders don’t like your business. It’s because it’s difficult to reach an independent owner/operator.  Mass advertising is too expensive, given the relatively small number of customers being targeted.  Direct mail, phone calls, or visits to the station rarely reach the owner. 

So if lenders aren’t coming to you, and you want to find financing, how do you start?  The best sources are referrals from jobbers, industry brokers, customer references, local or regional trade shows, or the internet.  And of course, the bank where you currently do business.

Local banks usually have limited capacity for loans into one industry segment.  If yours can’t help you, then the best place to start is to ask your jobber and fellow owner/operators who they borrow from.  The advantage here is twofold.  First it identifies a lender who has shown a willingness to lend to the C&G (Convenience & Gas) industry and probably knows your market.  Second, there’s an implicit recommendation for you as a good operator – particularly if your jobber refers you.

Brokers can be helpful in the right situation – see our recent posting on using a broker.  Trade shows have seen a decline in attendance by financial institutions – it’s unlikely that any will be at trade shows during 2009! 

Which brings us to the Internet – a search method increasingly popular for finding financing.  With all things on the Internet, you’ll want to take the standard precautions regarding security of your confidential information.  You’ll also want to make sure you know who you’re talking to.

If you do a search using key words or phrases like “Gas Station Financing”, or “Gas Station Loans”, you’ll come up with a wide assortment of results.  In general, the results can be divided into 1) real banks, 2) specialty finance companies, 3) mortgage brokers, and 4) hard money lenders.  It’s not always easy to tell the difference.

Banks  Some of the search results will be real banks.  Not many these days, and you’ll probably recognize the names as either local or regional brands.  If you’re not sure, take the name and do a separate search on it – you should get enough information to figure out if it’s a true bank.

Specialty Finance Companies  These entities have their own funds for lending and, like a bank, have no middle-men asking for additional fees.  In all probability, they will keep the loan on their books and service it for a period of time after funding. Petrobanc Finance is a specialty finance company.

Brokers  It may not always be obvious from the homepage of the website if an entity is a broker, a bank, or a specialty finance company.  They may be ‘captive’ brokers, originating loans for only a few financial entities, such as insurance companies, or they may ‘shop the loan’ to a variety of lenders.  The key is that there will be a separate set of fees, they do not control the decision making on loan commitments, and they will not service the loan after funding.

Hard Money Lenders  These may be similar to Specialty Finance companies in that they lend their own money and service the loan.  However, these are essentially hedge funds looking for high returns.  They focus on very short-term loans (one to three years) at rates 5% or more above average.  They require very little documentation and move quickly.  But it’s very expensive money and should be used as a last resort only.

Author: Kevin Morley 

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During the underwriting and approval process for a gas station loan, the underwriter will review and analyze both the borrower’s financial data and the operational information.

The primary analysis will involve cash flow. The first thing the analyst will look at is a cash flow calculation.  Many banks will use different formulas but they all basically are looking to evaluate the same thing which is how much cash does the business generate.  More specifically, how much cash is generated by the station as a ratio of the loan payment for the anticipated loan.  The main question is whether the station generates enough money to pay back the loan with enough left to satisfy the borrower’s needs.  The financial instituition will most likely use a conservative approach to create cushion in the event of a downturn.

As you’ve probably surmised, underwriting is as much an art as a science.  While rules exist regarding minimums for these financial ratios, the underwriters’ judgment plays a role in determining the specific calculations.

For example, a classic judgment call involves “add-backs”.  These are expense items shown in a borrower’s financial statements that may not be recurring items.  Therefore, the analyst has to determine whether to adjust the calculation of cash flow by adding back the particular expense.   A significant loss by theft, documented by a police report, might fall into this category.  There may also be one time gains that will be deducted or situations that are not typical and these will be considered also.

Another judgment call might involve adjusting sales and revenue for loss due to road construction.  For example, a 3-month construction of a turning lane in front of a station might cut sales 50 percent during that period.  The analyst will determine the extent to which the financial statements will be adjusted to compensate for the event.  It will help if a stabilization period of three to six months has elapsed before applying for the loan, allowing new sales and financial data to support the past-period adjustment.

So the lesson to be learned here is: the quality of your financial reporting is critical. From the lender’s perspective, better financial data increase the underwriter’s ability to make the judgments necessary to qualify the borrower and the site for the loan.

Read our related post, What are the steps to approval of your gas station loan?

Author: Scott Poulsen

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In a recent blog entry titled Looking for financing? Wondering what lenders look for?, Petrobanc Finance focused on what borrowers need to do to get funding for their gas stations.  The discussion centered around documents needed and steps to be taken.

Once this information is given to the chosen lender, what happens? 

While the process varies by company, it will include the following steps, usually in this order.

Underwriting and Approval   An underwriter will review the file for completeness and will perform various financial analyses on the data.  Multiple follow-up calls to the customer are normal during this process to gather additional data and resolve deal-specific issues.  In addition to gathering data the underwriter is “getting to know” the potential borrower.    The analyst will write up a credit-approval memorandum, which includes the analyses of the potential borrower and will be the vehicle for approval by appropriate levels of management.  In most financial institutions there are numerous levels of signing authority that are typically defined by dollar amount.  The credit approval memorandum serves as a recommendation from the original underwriter and truly becomes an approval once the necessary management level signs the memorandum.  This usually takes one to four weeks, depending on the lender’s workload and how quickly the borrower responds to additional questions that the other signers may present.

Due Diligence  If the loan is approved, and the borrower accepts the terms of the loan (usually by signing an acceptance document), the lender will move forward with appraisals, environmental reviews and title searches.  If necessary, a feasibility study may be completed for new construction by an independent company to verify the borrower’s business plan assumptions.  Issues surfaced by during the due diligence phase will be resolved before moving to the next step; the most common are old equipment or property liens the borrower was unaware of.  This step usually takes four weeks or more. (In some cases the appraisal and or the feasibility study may be requested prior to the approval being prepared.)

Documentation and Funding   Once due diligence is complete and all outstanding issues are resolved, the loan will move into documentation, where loan documents specific to the proposed transaction are compiled and reviewed by the lender’s attorneys.  Generally, the borrower will be given ample opportunity for their attorney to review and correct as necessary.  Funding will proceed on a schedule determined by the type of loan.  A refinance will be scheduled in accordance with a payoff agreement with the prior lender.  The same is true for acquisitions, but will also include the seller.  Construction funding will be more complex, with payouts for construction progress and ‘term-out’ of the loan when construction is complete.

Author: Scott Poulsen

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Here’s a quick list of the most important things that prospective borrowers can do to ensure they merit financing for their gas station.

Use a CPA, not a bookkeeper. You need financial statements that meet GAAP (Generally Accepted Accounting Principles) standards so that your lender will feel they can rely on the numbers they’re looking at. They’ll be more inclined to give you a better deal and the money you will save in the long term will pay back the cost of a CPA many times over. A ‘tax preparation firm’, or your spouse using QuickBooks, won’t work.

Build your cash reserve. The days of 90% financing are gone. At best, you’ll get a loan for 80% of the appraised value of the land, building and equipment – nothing on business value. Many lenders are holding the line at 75% or less, knowing that the more of your equity you have in the game, the less likely you are to default (and if you do, the less they’ll lose).

Clean up your credit score. Scores of 680 or more for each loan guarantor are the minimum today. Get professional advice on how to improve your score. Tragically, many prospective borrowers fail because of old cell phone charges or doctor bills that insurance failed to pay. Better to address these problems before seeking financing. The money you’ll save by getting better loan terms will most likely cover the cost of fixing these problems.

Brand your station with a major brand image. The lender will infer that your site meets image and operational standards that improve attractiveness to customers and make your site more competitive. Many lenders will visit your site personally to verify the quality of the site.

Establish a long-term supply agreement with a reputable jobber. Lenders want to have confidence in the supply of your most important product.

Understand and operate your business. Absentee owners are one of the most common reasons for business failures. If a lender calls you and hears the cash register ring in the background, your involvement in the day-to-day management will become obvious.

Have your paperwork ready. Lenders are inundated with commercial loan requests. They’re time-constrained, so if your submission is organized and substantive, they’ll move your request to the top of the pile.

Organize the following documents in a folder:
- A summary of your loan request (how much, what is it for)
- Your resume, including a summary of your company’s organizational structure, and of your experience in the industry.
- Corporate tax returns (signed) for the last two years (unless you are a sole proprietorship)
- Personal tax returns (signed) for each owner for the last two years
- Financial statements for each site for the last two years, plus through the most recent quarter of the current year. Revenue and Cost-of-Goods-Sold (COGS) should be broken out for fuel, C-store and other revenue generators. Balance sheets for each year, and the current quarter should be included.
- Gasoline sales (in gallons) month-by-month for the last two calendar years, and the current year. Lenders who understand gas stations will want this information, and you’ll want to have a ready explanation for any declines in volume. If your jobber provides this information, even better as it offers a third-party verification of your performance.
- Personal financial statement: you’ll need to show you’ve got the cash to close the deal
- A copy of your supply agreement: from a reputable jobber
- References: contact names and numbers for your jobber, your banker, and any major supplier
- Pictures of your site: while not mandatory, may have sufficient Wow! to gain more attention

Above all, ensure you hire a CPA that understands your business. This list starts and ends with this, because your CPA is absolutely critical to your success in securing financing.

Author: Kevin Morley

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If you’re an independent gas station dealer who has tried to buy or refinance a site recently, you’ve gained firsthand experience of the stark new reality of the financial markets.

In the past you had choices. At the national level, major institutions like Citigroup provided competitive options on conventional mortgages and had virtually unlimited funding capacity. At the local or regional level, small banks could help with either conventional or SBA loans. Numerous brokerage firms, some locally based, many internet based, promised to ‘shop’ your loan for the best terms. Reflecting the excess of liquidity in the financial markets, rates and terms were highly competitive. Floating rates at or below prime were common. Because the yield curve – the difference between short term and long term interest rates – was so low, fixed rates were also available at attractive levels.

Less-than-stellar borrowers found themselves in the enviable position of having lenders fight over them, while those who were more stable could expect terms once reserved for only the best of the blue-chip players in the industry. All because there was too much money chasing too few deals. How times have changed.

Despite today’s business environment, the good news is that financing is still available for independent dealers in the Convenience & Gas (C&G) industry. The bad news is, you have to know where to find it and how to qualify for it.

With credit standards tightened considerably, obtaining a loan requires you to put the best face on your business and management. You will need to work hard to ensure your lender is comfortable with the underlying financials for your business. Solid financials presented in a professional format, strong references from suppliers and bankers, a proven track record for your business operations, and excellent personal credit are crucial elements. Equally important is the brand image of the retail site(s) being funded.

And remember, your lender will evaluate everything in light of the risk involved. Regardless of how promising the deal appears, the lender will want to protect itself with an exit strategy that details how it will unload your store without taking a hit.

Author: Kevin Morley

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