How to start a rental company

20 March 2008

The equipment rental business is a “fast” business. Companies can start quickly, grow quickly, raise money quickly, change quickly, get acquired quickly –and also fail quickly. Compared to many industries, it can be easier and quicker to get into the equipment rental industry, even if you have to raise a great deal of money to get started. A new–start rental company can be up and running in a matter of days or hours, with simply one person and a phone, without even owning any equipment. With very few exceptions, most people who start their own rental companies either used to work for other rental companies, or were customers or suppliers of rental companies. Other routes to entry to the market include contractors who hire their own equipment when not in use. Very rarely, someone will choose the equipment rental industry after careful analysis of the market, such as Wayne Huizenga setting up NationsRent in the US having previously built Blockbuster Video, Auto Nation and Waste Management Inc.

Barriers to entry

Finding, keeping and motivating talented, experienced people:

The ‘4 Ps’: product (selection/maintenance/engineering/training), promotion, place (logistics and operation), and pricing of a new start rental company cannot be adequately covered in a short article. However, the key to all of these is the 5th ‘P’, which is People. Often, the newest, smallest equipment rental companies have and keep the best people –because they are shareholders. A golden rule of attracting the best people is that many, many people would like to build something for themselves, rather than always being an employee.

Do it yourself, or with a partner?:

“If you have the right people, you can't fail”, is what Ward Bushnell of Genie Industries used to say. The right, talented people will develop a good plan, convince people to invest, market and deliver the right equipment to the right customers on time and on the right terms to make a good return.

I often tell people who have a very specific, but incomplete, skill sets to not hesitate to get a good business partner. ‘Yes, but won't I have to give up too much of the company to them?’ Perhaps, but don't obsess about maximizing your percentage of the ‘pie’ at the expense of making the ‘pie’ bigger. Bill Gates currently owns only about 9.5% of Microsoft shares, but that's still worth over $25 billion.

How much money to raise?

Most rental companies have strategies on fund raising that fall into two categories:

1 Determine through analysis and vision how much fleet you need to arrive at a strategic market position, then determine the best financial structure to fulfil that requirement. This can include owner investment, institutional capital investment, and bank debt/leasing.

2 Raise money (to finance hire equipment) as quickly as possible without giving away any equity.

The majority of small rental companies use method number 2. Yes, it's easier not to contemplate giving up any control, but the result is quite a few small rental companies that look and operate alike.

Re–hire –why own any fleet at all?

A surprising amount of rental companies rehire in large portions, or even all, of their rental equipment. Although usually more expensive than owning fleet, hiring from other hire companies can provide much more flexibility, and faster growth than raising money from banks and leasing companies. Some equipment rental companies start exclusively with re–hire, until they can show some trading history / cash flow to the banks to then acquire their own fleet.

Where to find money to build your own rental fleet?

Go to the banks last. They generally hate taking any real risk, and for a new company will only finance sums that are secured on assets or existing cash flow. One of the first questions they will ask is how much capital is being invested in the business, and who will be willing to provide guarantees.

Look in your own pocket first: If you and your partners/co–owners want to keep most or all the business to yourselves, the other investors, and the banks and leasing companies, will want to know how much your ‘stake’ in the business is. One rule of thumb is to show the banks that you have invested at least a year's salary, and that the structure of the business assures that you will lose your money before the bank does. This is true in most European countries.

Look to the equipment suppliers/manufacturers: After the owners of the rental company, no–one gets as excited about a new rental company as a supplier of equipment. Quite a few suppliers have arrangements with banks and leasing companies to guarantee customer financing, or provide comfort, which are especially valuable for new–start businesses.

Many manufacturers are also in the rental business, perhaps in one country rather than another, or have a hidden interest in one or more of their customers. Because the suppliers of equipment may have healthy profit margins, or perhaps they are just desperate to grow sales, they will take some risk –and often not demand the same return or conditions as a venture capitalist. Sometimes, this is by means of a program with a leasing company, or the manufacturer may have a leasing company in–house. In powered access equipment, of the world's top 10 manufacturers, at least seven have taken a serious financial riskposition in one or more rental companies.

However, 2007's strong world economy means that many manufacturers are simply not that hungry for new business. Worth a mention is that some rental companies, and manufacturers of equipment, will provide fleet to new start rental companies on a rent–to–rent basis. This may be ideal for a long term rental on a specific project.

Look at related industries –customers and service suppliers: Often transport companies, contractors, maintenance companies, property companies and others have a potential benefit from financing an equipment rental company.

Institutional Investors & Venture Capitalists: Just when you hear that equity investors do not invest in start–ups, especially rental companies, all of a sudden another one is seen writing out a big cheque. More common, however, is their willingness to invest as soon as the original owners reach some goal or milestone.

Talk to everyone else, then banks and leasing companies: For a known, experienced management team, with a great business plan, there are leasing companies in most parts of Europe that will finance pre–revenue start–ups. They will want to see an owner's investment, perhaps a substantial deposit (20% or more), and nearly always personal guarantees from the owners. In Southern and Eastern Europe the key is often a guarantee from an individual (or a business) that has a very high net worth.

A good rule of thumb in more liquid financial markets in Northern Europe is that many banks will give a leasing line of credit for a start–up to purchase equipment equal to the owner's cash stake; with the owner's full personal guarantee providing extra security.

Somewhat easier to obtain in most countries is cash flow finance –usually factoring or loans to give the rental company instant cash even though customers may pay on 30 to 90 days. This can have much lower interest rates than start–up lease finance, but can be inappropriate for long–term investment in fleet.

In conclusion, a small rental company can be started with moderate personal funds in today's buoyant economy. Most rental markets are riding high on the crest of the wave, and we are seeing many high value acquisitions. However, rental company owners should consider what the opportunities are by looking to finding the right partners, including individuals, manufacturers and institutions.

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