How can business owners make better equipment purchasing decisions?

Ralph Petta

President & Chief Executive Officer Equipment Leasing & Finance Foundation

One of the most effective ways that a business owner can maximize purchasing power is through financing equipment acquisitions. Financing increases purchasing power in a number of ways. For one, leasing terms with 100-percent financing and no down payment avoid a large cash outlay, as with a purchase or loan down payment. It provides businesses with access to more and better quality equipment, which enables them to be more productive with smaller, more affordable monthly payments rather than making a big, upfront cash purchase. Equipment financing also enhances purchasing power by freeing up working capital so it can be used in other areas of the business. Our research points to increased construction equipment investment this year due to a number of factors, including gains in wages and income, personal consumption, housing growth and expected infrastructure spending. Equipment financing is used by nearly 8 in 10 firms in the United States to acquire the equipment they need to operate and grow. Ongoing innovations in the equipment finance industry will continue to increase flexibility and convenience for end-users, making it more attractive than ever to leverage the power of financing.

Herb Brownett, CCIFP

Senior Vice President Brubacher Excavating Inc.

Sound decision making with regard to purchases of major pieces of equipment in a capital-intense, heavy-highway construction company is critical to the long-term profitability and financial health of the company. It is not uncommon for the owners of such companies to be enamored by equipment. This can lead to purchasing decisions that are intuitive or emotional, a condition that construction financial managers humorously call “yellow fever.” A best practice is to take a long-term view of the company’s equipment fleet. This starts with a 5- to 7-year Cap-X spending plan. The plan should schedule each piece of major equipment with its current hours, projected economic total hours and estimated hours per year. Based on this plan, a replacement year can be identified for each piece of equipment. Replacement schedules for individual pieces can be shortened or lengthened to smooth out total annual purchases. Since it may be subject to changing economic conditions and equipment needs, the schedule should be updated annually and adhered to rigorously. Companies that maintain this discipline will have higher equipment utilization and lower long-term equipment costs, which are two key ingredients to a profitable, heavy-highway construction company.

David James, CPA, CCIFP

Chief Financial Officer FNF Construction Inc.

For capital-intense construction companies, equipment purchasing becomes a significant part of their business routine, and must be done with a disciplined approach. This applies both to the decision to buy, and the decision to finance the acquisition. The ability or desire (these two elements are not always the same) to finance equipment should be a consideration during the go/no-go decision on the acquisition. Financing options can be complex, and they will impact the contractors’ financial statements and cash flows. Contractors should establish a threshold for using cash for acquisitions versus using financing. The threshold may be related to the overall company cash flows, equipment turnover or a function of debt covenants with your bank. Once the threshold is exceeded and financing alternatives are being explored, realize that there are several approaches to this activity. Debt financing, capital leases and operating leases all come with their own set of pros and cons. Rates, terms, cash flow, taxes, your flexibility to sell the asset and balance sheet, and financial ratio implications will all need to be considered. Lender resources may include the vendor, banks, leasing companies and specialty lenders. In short, buying smart includes funding smart. To submit a question to “Ask the Experts,” email Managing Editor Elizabeth Manning at [email protected].