Equipment Finance: Industry Outlook

How 2014 shapes up for nonresidential construction businesses will likely be two different stories, depending on whether the business focuses on public or private construction projects. Private construction has the potential for greater recovery as the national economy expands (albeit at a continuing slow pace), while public nonresidential construction appears less likely to rebound soon as public spending declines. Regardless of whether your business focuses on private or public construction, understanding the business environment and how to deploy an asset management strategy will help you plan for the year ahead.

Prevailing Conditions

Construction demand and other market conditions in which contractors operate provide important signposts for business planning. The U.S. Census Bureau reported that the seasonally adjusted rate for total nonresidential construction spending in August 2013 was up 1.3 percent during the same period in 2012. The seasonally adjusted rate for private nonresidential construction was up 4.3 percent year over year, while public nonresidential construction spending was down 1.9 percent year over year.

According to Associated Builders and Contractors Inc. (ABC), most economists expect faster recoveries in nonresidential construction spending in 2014. But, like most industry sectors, nonresidential construction continues to face headwinds from uncertainties in government fiscal policy that could hurt the economy. ABC expects a continued wait-and-see attitude among developers, financiers and others due to pending wrangling over the federal budget.

The ability to finance construction-related equipment is important since the construction sector is equipment-intensive. Key industry data offer insight into how readily contractors can expect to access financing for the equipment that keeps their businesses operating. The Monthly Confidence Index of the Equipment Finance Industry (MCI-EFI), released in October 2013 by the Equipment Leasing & Finance Foundation, was compiled during the federal government shutdown and showed its first decline in five months. Comments from industry executives who were surveyed for the confidence index showed that, while industry fundamentals are strong, dysfunctional federal government action was impeding growth of the equipment finance industry and the U.S. economy.

The good news is that 85 percent of the executives surveyed forecast that demand for leases and loans for capital expenditures would increase or stay the same into Q1 2014. Also encouraging for contractors who want to finance equipment for their businesses is that all of the executives surveyed expected access to capital for funding equipment acquisitions to either increase or stay the same into Q1 2014.

The Equipment Leasing and Finance Association’s Monthly Leasing and Finance Index (MLFI-25) has reported mostly positive year-over-year growth in new business volume for equipment finance activity during the last three years. The only three months of year-over-year decreases occurred in 2013. This trend was attributed in part to the uncertainty created by the inability of policymakers to agree on a sustained tax and spending policy. However, construction firms looking to finance equipment should be encouraged by MLFI-25 data showing credit approvals have remained consistently above 75 percent during the last two years.

An Asset Management Strategy

In the face of slow economic growth and continued uncertainty, knowing how to strategically finance equipment using an asset management program can enhance your financial performance and capital productivity. Asset management is a term that refers to the ability to plan, acquire, manage and recycle assets in a systematic manner. Each stage of asset management has a significant impact on the return on investment. Business owners should employ the asset management function throughout an asset’s entire life cycle, from the delivery of equipment to its installation, use, maintenance and de-installation and disposition.

To help build your asset management strategy, consider your company’s needs using the following checklist:

• Company’s financial goals – You should carefully consider your company’s financial goals, such as improving cash flow or meeting a return on net assets. Establishing acquisition guidelines based on equipment needs and financial objectives is crucial.
• Length of use of equipment – You should review equipment use and estimated obsolescence to help establish a meaningful guideline for future acquisitions. Determine exactly how the equipment is being used and when it will no longer be useful. The wisest investment is financing the asset for that set amount of time with a disposal plan in place for when the asset is no longer improving productivity but rather causing a productivity plateau or even decline.
• Equipment insurance and maintenance costs – Contractors would be wise to track maintenance and insurance costs associated with equipment, especially heavily-used equipment. In other words, consider whether or not it would be cost-effective to keep a piece of equipment for an additional year, which would incur additional maintenance costs that could affect the soundness of your financial investment.
• Need for Flexibility – You should consider the amount of flexibility your business requires, so you can decide whether financing or paying with cash makes more sense. Lease financing allows usage of the asset for a set amount of time. A contractor’s needs may fluctuate from project to project, so you must decide what kind and how much equipment is needed.
• Expected growth – Carefully assess how much growth is expected during the next one- to three-year period. The amount of expected growth has an effect on the acquisition mix of ownership, renting and leasing. Most businesses grow and change at varying rates. If an organization experiences a sudden growth spurt, having the flexibility to change your asset mix is key. The ability to dispose of equipment that is no longer needed during slower times is equally important.
• Types of financing options – When financing through a lease, the type of contracted lease has implications for equipment renewal terms and future acquisitions. Unless you have contracted under a master lease, most likely you will need to negotiate a new lease contract for additional equipment acquisitions. If you anticipate business growth that will require additional equipment, you can avoid a new leasing contract by negotiating an option to add equipment under original terms and conditions when structuring a lease program, which will help stabilize your capital outlay.

Equipment financing is used by seven out of 10 businesses, and half of all equipment acquisitions in the U.S. are leased or financed. Using equipment financing strategically will benefit your business regardless of market and economic conditions.