Plan for Growth with Equipment Financing

Some signs of industry performance are encouraging. The American Institute of Architects’ recent “Consensus Construction Forecast,” for instance, shows increased spending in November 2012 for most commercial sectors and forecasts growth potential for nonresidential construction in 2013 and into 2014. On the other hand, sluggish economic growth, federal spending cuts and slower growth projections in some nonresidential construction sectors continue to feed uncertainty. 

As a result, construction businesses may still be hesitant to make investments. Using equipment financing to secure the assets a business needs to operate can help reduce risk.

The $725 billion equipment finance sector is a valuable resource for construction businesses to draw upon for the financing they need to operate and grow. 

The equipment finance industry has emerged from the recession with finance volumes at an all-time high, the result of double-digit growth in equipment investment and a favorable interest rate environment, according to the “U.S. Equipment Finance Market Study 2012-2013” from the Equipment Leasing and Finance Foundation. The study reports that 72 percent of all companies used some form of financing when acquiring equipment, including loans, leases and lines of credit (excluding credit cards) in the fiscal year of 2011. The study also shows that companies with less than $1 million in revenue used financing in 49 percent of their equipment acquisitions, while companies with revenues between $25 million and $100 million used financing in 86 percent of their acquisitions during the same period.

December 2012 data from the Equipment Leasing and Finance Association’s Monthly Leasing and Finance Index (MLFI-25), which shows economic activity from 25 companies representing a cross section of the industry, reports that cumulative new business volume for 2012 rose 14 percent over 2011 and was at its highest level since 2006, when the MLFI-25 was launched. In addition, the Equipment Leasing and Finance Foundation’s Monthly Confidence Index for the Equipment Finance Industry in January was at an eight-month high.

However, despite the strength the industry is showing, finance volumes are expected to expand at a more moderate pace into the first half of 2014. This is a function of the modest projected investment in equipment and software this year resulting from fiscal and economic uncertainties. There is a bright spot, though: construction firms looking to finance equipment should be encouraged by MLFI-25 data showing that credit approvals consistently ranged above 75 percent over the last two years. 

How Can You Make the Right Equipment Financing Decision?
Ask the following questions to improve your understanding of your company’s needs, your equipment financing company’s ability to meet those needs and key features of the lease financing agreement being considered:

• How will the equipment be used? Determine how your company will use the equipment and for what length of time. A simple cost/benefit analysis comparing the leasing payment to the expected revenue generated by the leased equipment’s use will help determine if leasing is a profitable financing option.

• Does the equipment finance company representative understand my business? It is to your advantage to work with someone familiar with your market and the service you are seeking, and this is particularly true with lease financing. A key benefit of working with professionals who know your business is that they can take into account individual company needs and requirements, such as cash flow, budget, transaction structure and cyclical business fluctuations.

Your tax and cash flow requirements are important for the equipment finance company to understand because leasing and owning have different tax treatments. Many lease payments are an allowable, tax-deductible overhead expense from corporate income, as opposed to the depreciation of equipment over five to seven years when it is owned.

The value of the leased equipment at the end of the lease term, known as the residual value, presents another reason to work with an equipment finance company that knows your business. An equipment finance company that has the knowledge and experience to set the residual value accurately can provide you with the best possible lease payment schedule.

In addition, the equipment financier should be considered a valued consultant and partner in your company’s financial strategy, providing additional benefits through life-cycle asset management solutions.

• What are the terms of the financing agreement? Before signing an agreement, you should know your company’s liability and the equipment finance company’s responsibility for the equipment being financed. This is the time to find information for issues including costs, installation, maintenance, upgrades and end-of-agreement options. 

Ask whether the equipment finance company will assume the costs for insurance, taxes and maintenance of the equipment. Determine who is responsible for installation, asset management and tracking, maintenance servicing and any other services that may apply.  

Given the potential for circumstances including advances in technology and noncommercial construction market growth, you will want to be prepared for upgrading or adding equipment under the agreement. Find out whether the agreement includes terms that would enable changes such as those contained in a master lease. A master lease is designed to facilitate changes in a business’s equipment needs. This type of agreement provides greater flexibility by allowing the leasing of certain assets and the acquisition of additional assets under the same basic terms and conditions without negotiating a new contract.

Ask what the conditions are if you decide to terminate the financing agreement earlier than originally contracted. Changes such as terms of length requested after signing the agreement could result in additional payments or charges. Determine what your responsibilities are if equipment is lost or damaged.

End-of-lease options should be specified in your equipment financing agreement as well. Determine whether you will renew the lease, return the equipment or purchase the equipment at fair market value or a nominal fixed price. If you decide to return the equipment, find out whether you must return the asset to the equipment finance company, what documentation and packaging materials are required for return, who will pay for shipping or delivery and when the equipment is due to be returned. If you decide to purchase the equipment at lease end, ask when you will receive the title.

All the conditions should be clear, included in the agreement and reviewed thoroughly with your equipment finance representative. 

• What are the total lease payments and costs? To eliminate future misunderstandings about the number of payments, the total monthly payment due and any additional costs related to insurance, taxes and other charges, determine these figures upfront and get them in writing. Also, be sure to ask if additional costs associated with the lease may be incurred during the lease term, such as late payment fees and other surcharges.

Equipment leasing and financing plays a significant role in helping construction business owners acquire the equipment they need with increased flexibility, regardless of business conditions. With the right knowledge, you will be in a strong position to acquire equipment as you ramp up for growth.