William G. Sutton, CAE, is president of the Equipment Leasing and Finance Association, the trade association that represents companies in the $518 billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods.
Finding the right equipment finance option can pay off in the end.
Most construction businesses need equipment to operate-from computers to furniture to fleet vehicles-and a construction business is no exception. The construction industry's equipment-intensive nature can require a variety of equipment types from heavy grade to compact equipment and attachments. In addition, non-construction equipment needed to run the business, such as IT and office equipment is needed.
Aside from internally generated cash flow or credit lines, construction businesses seeking to acquire equipment should investigate other choices to finance their capital spending. Many finance companies-from commercial banks to manufacturers and smaller, more specialized commercial finance companies around the country-offer a variety of options for financing construction and other types of equipment. These options couldn't come at a better time for construction businesses, which are experiencing the worst market conditions we've seen in years.
The Equipment Leasing and Finance Association (ELFA) compiled data on monthly equipment finance activity and found that construction has been in the top three underperforming industry sectors for new business originations since October 2008. The ELFA 2010 Survey of Equipment Finance Activity, a representative cross-section of equipment lease and loan origination reported by ELFA member companies, showed the following results for the construction sector:
- New business volume for construction industry end users was 7.2 percent of ELFA members' total equipment finance portfolios in 2009, a decrease from 9.6 percent in 2008.
- New business volume for construction equipment was 7.7 percent of ELFA members' total equipment finance portfolios in 2009, down from 11.2 percent in 2008.
For a small- to mid-sized construction company, regardless of current economic and market conditions, financing the acquisition of equipment rather than using cash may offer significant benefits while mitigating risks. But above all, it's important to keep in mind that deciding how you finance should be the result of careful planning based upon many factors. There are several things to consider while searching for the financing option that best matches your company's needs, including the following: practicality, cost-effectiveness, type and use of equipment, the length of time the equipment is needed, your tax situation, cash flow and long-term capital and credit demands related to future growth. In addition, examining the ways in which financing equipment benefits a company's bottom line and business operations can help provide reasons to finance construction equipment. Some of the benefits of financing equipment include:
1. Flexible Financial Solutions
The types of financing solutions equipment finance companies offer-especially leases-are flexible and can be tailored to specific accounting, tax or cash flow needs. They run the gamut from fair-market value (FMV) lease transactions and capped FMV leases to full payout loans.
2. Capital Preservation
Preservation of capital is a consideration of most businesses that makes equipment financing an attractive option. Investing in large capital expenditures often represents big financial risks, especially for small companies. Financing versus spending cash, and particularly the type of financing employed (lease versus loan), can help mitigate the uncertainty of investing in a capital asset that may not yield the desired return, increase efficiency, produce cost savings or future sales. For instance, lease payments can often be matched to the equipment's productivity.
3. Improved Expense Planning
Maintaining cash flow and consistent budgeting is another factor to consider. Instead of significant capital outlays resulting in huge budget fluctuations, financing enables even expense planning. Tax considerations also come into play. Full payout leases or equipment loans allow the borrower to take depreciation on the asset acquired, while an operating or FMV lease allows the borrower to take lower payments but no depreciation. A loan allows you to lock in your payments for the expected life of the asset, while a lease provides lower expense for the expected time of use.
4. Business Cycle Flexibility
Flexibility is another key aspect of equipment lease financing. Some types of leases allow for lower monthly payments while a project is ramping up and revenue is not yet being generated from the equipment, seasonal business fluctuations and other specific circumstances your business may experience.
5. Up-to-Date Technology
It's important to have the latest equipment in today's business environment. Many businesses cannot afford to buy the equipment they need to be competitive and thrive. By funding equipment acquisitions through term financing, businesses are often able to acquire more and better equipment that may have been out of their reach if they only considered acquiring it through a cash purchase.
6. Equipment Experts
Some equipment finance companies are equipment experts and offer equipment specialties while other financial sources do not. Many construction equipment finance experts have special relationships with manufacturers and distributors. Plus, several equipment financers specialize in certain equipment types or industry categories, such as IT, office equipment, manufacturing or medical. Construction equipment is no exception.
7. Managed Obsolescence
Managing obsolescence is a strategic benefit of equipment lease finance. The risk of owning obsolete equipment (for instance, IT equipment) is eliminated if you use lease financing for your acquisition since many agreements allow for easy and fast equipment updates.
Additionally, most equipment finance companies, in partnership with their vendors, will work with the customer to "right size" the equipment, by structuring co-terminus transactions or facilitating trade-ups to ensure the customer has the appropriate equipment. And most financers handle the disposal and other ownership burdens of equipment when it is time to upgrade.
8. Dependable Asset Management
Asset management is a key benefit of many forms of equipment finance options, ensuring equipment in production isn't mis-used. Knowing where your equipment is being used, how much it's used, and when it is time to upgrade or update it-including disposal-is an important service that many financing companies offer. A good asset management program tracks equipment throughout its life cycle from delivery to its installation, use, maintenance and finally de-installation and disposition.
9. Equipment Disposal
Equipment disposal is another issue to consider before financing equipment. Most businesses don't have the resources or knowledge to efficiently manage and sell their old equipment. The convenience of having equipment managed by a third party, such as an equipment leasing and financing company, allows businesses to focus on core operations. With lease financing, for instance, you may essentially outsource the equipment management function so the financing company can handle its disposal or resale when it is time to retire the asset.
10. Reduced Risk
Equipment purchases involve risk to the owner-from equipment expertise to capital outlays and from asset management to obsolescence-which become the burden of the equipment owner. Financing removes many unnecessary risks, allowing you to focus on your business.
Recognizing how the benefits of equipment financing apply to your business can enable you to acquire the construction equipment you need for your company without hamstringing your budget or your company's future. Remember, you make money by using equipment, not necessarily by owning it.
Construction Business Owner, September 2010