Funding Your Equipment Acquisition Strategy

The outlook is bright for nonresidential construction in 2016, with a number of economic and regulatory factors contributing to a favorable market environment. After years of spending cuts and budget uncertainty, state and local governments appear to be on more secure financial footing and poised to spend on construction. The Fixing America’s Surface Transportation Act was passed, authorizing more than $200 billion for highway projects and $70 billion for public-transportation-related projects. Sustained, low oil prices translate into lower costs for fuel, as well as petroleum-based construction materials, such as asphalt, lubricants, waterproof coatings and PVC pipe. Bonus depreciation of 50 percent on equipment has been extended through 2019 and the cap has been raised from $25,000 to $500,000.

The Associated Builders and Contractors forecasts nonresidential construction spending will grow 7.4 percent this year. Recent research shows contractors will be well equipped to operate and take advantage of opportunities for growth. According to the Wells Fargo 2016 Construction Industry Forecast, which focuses on nonresidential construction, 94 percent of contractors expect to acquire new equipment, and 90 percent of contractors expect to acquire used equipment this year. The decision making that goes into funding acquisitions can have a significant impact on equipment-intensive construction businesses. Contractors deploy a range of equipment acquisition approaches that are influenced by many factors, from the type of equipment and the length of time it’s needed to a company’s number of years in business and its financial position. A case can be made for implementing a multipronged approach to funding options, and equipment financing should be an integral part of this approach.

Equipment Finance Outlook

A look at recent industry data and research shows an environment in which contractors will find readily available financing options for construction and other equipment. The Equipment Leasing and Finance Association’s (ELFA) top 10 equipment acquisition trends for 2016 forecasted that the rate of growth of equipment acquired through financing—while slower—will increase solidly. Of the projected $1.627 trillion that will be invested in plant, equipment and software in the United States this year, approximately 64 percent ($1.049 trillion) of that investment is expected to be financed through loans, leases and lines of credit. Construction equipment comprises a significant percentage of equipment finance industry business. ELFA’s 2015 Survey of Equipment Finance Activity reported that construction equipment represented 11 percent of equipment financing new business volume reported by ELFA member companies in 2014, and as an end user of equipment finance, the construction industry represented 8.1 percent of new business volume. The annual “What’s Hot, What’s Not” equipment leasing trends survey, conducted by Independent Equipment Company, has ranked construction equipment first in portfolio preference among equipment finance executives for the last 2 years.

According to the Monthly Confidence Index for the Equipment Finance Industry, released in January by the Equipment Leasing & Finance Foundation, 93 percent of equipment finance industry executives surveyed expected more or the same access to capital to fund business. Construction firms looking to finance equipment should be encouraged by ELFA’s Monthly Leasing and Finance Index, which shows that credit approvals have remained consistently above 75 percent over the last 3 years.

Wide-Ranging Benefits

The implications are more than financial when deciding between buying, leasing or renting equipment. There are operational and strategic benefits with equipment financing that should be carefully considered in order to implement an optimal equipment acquisition program. These include the following:

• Preserving capital—Equipment financing enables savvy contractors, regardless of their size, to prioritize preserving their capital. They can then use their cash to enhance their business through such activities as: marketing, guarantee bonding requirements, hiring personnel and even holding onto cash for a down cycle. Often, 100 percent financing with no down payment is available.
• Consistency in equipment acquisition—One of the major benefits of equipment financing for contractors is that it enables consistency in managing assets. By establishing a relationship with just a few providers or one primary equipment finance provider, contractors can have consistency and efficiency in negotiating terms and centralized control and management of the financed assets throughout their company. Contractors should also find that leasing on a long-term basis is less expensive than renting.
• Flexible terms—Equipment finance companies can offer contractors flexible financing solutions that can be customized to specific accounting, tax or cash flow requirements. Some leases allow for lower monthly payments while a project is gearing up and the equipment is not yet generating revenue. Tailoring lease payments to cash flow also allows for better budget planning.
• Access to more and better equipment—Even well-established firms with greater capital reserves should take advantage of the ability to acquire more and better-quality equipment through financing than they would if they were paying out a large lump sum to purchase it outright.
• Accommodates growth—Equipment financing enables additional convenience when planning for potential growth with a master lease. A master lease provides the ability to acquire other equipment under the same basic terms and conditions, without negotiating a new lease contract. With a master lease in place, assets can easily be added to a new schedule. Since the finance company can work with many different vendors, a master lease can give contractors access to multiple vendors on different schedules, without having to manage the transactions themselves.
• Outsource asset management—Financing companies can provide full asset management services that will track the status of your equipment, know when to upgrade or update it and provide services relating to maintenance and disposal.

Types of Financing

When selecting financing, a key question is how, and for how long, the equipment will be used. Long-term equipment types typically used in construction are often suitable for fair market value leases (FMV). Since they generally maintain relatively higher residual values, which the financing company can expect to realize through the sale or re-lease of the asset, FMV leases are usually lower in cost than if the equipment were purchased outright or with borrowed capital. It is also more economically beneficial to enter into an FMV lease for project-based work. If the equipment is still required at lease end, the finance company may provide the option to buy the equipment at a negotiated, fair market rate or use it at a reduced rental rate, depending on the lease terms. Contractors weighing the benefits of equipment financing against their needs will find it should play an essential part of their equipment acquisition strategy.