Equipment Financing – A Key Option for Construction Business
Thanks to the equipment intensive nature of the construction industry, a variety of equipment ranging from compact equipment and attachments to heavy grade machinery are required. But most construction businesses also need a range of non-construction specific equipment – from fleet vehicles to computers to furniture. But project managers, general contractors and business owners know that the heavy construction equipment can be costly.
When a construction firm needs to obtain any type of equipment, new or used, it is vital for parties involved in the decision making process to be familiar with all available options. This is because apart from the cost, construction equipment tends to depreciate over time with continued use. Apart from the usual credit lines or internally generated cash, building companies looking to acquire new equipment should look for other ways of financing their capital spending. Many companies in the financial sector – from manufacturers to banks and small, specialized commercial finance firms – offer a range of options for financing the acquisition to construction and other types of business equipment.
To preserve credit lines and save money, number of construction firms are opting to finance their heavy equipment instead of taking out a business loan or making cash purchase. It is important for the chosen financing option to match the company’s needs. Some of the factors to be considered when choosing an equipment financing option include cost-effectiveness, practicality, the length of time the company will need to equipment, type of equipment and its uses, the tax situation, cash flow and the business’ long term credit and capital demands. Equipment financing allows businesses to avoid the uncertainties associated with equipment ownership allowing them to focus on utilizing the equipment to run and grow the business.
There is a range of benefits that construction companies that opt for equipment financing enjoy. These include:
1. Preservation of Cash Flow
One of the most attractive benefits of construction equipment financing is the preservation of capital compared to other options. Acquiring construction equipment invariably involves huge capital expenditures which are a big financial risk, especially for start ups and medium sized construction firms. Depending on the type of equipment financing involved (loan versus lease), this option can mitigate the uncertainty associated with investing in capital assets that may not increase efficiency, yield the projected return, produce cost savings, or increase future sales. For example, some lease payments can be customized to match the equipment’s productivity.
Moreover, the lessee enjoys a number of tax benefits passed down from the lesser in the form of reduced payments. If the construction company cannot offset taxable income using tax depreciation as a result of current operating losses, alternative minimum tax or losses carried forward; they firm may effectively lose the depreciation benefits if they opt to purchase rather than lease.
2. 100 Percent Financing
While an initial down payment is required by a typical loan, leasing provides 100 percent financing. The lease can cater for most costs associated with equipment acquisition. These include use or sales taxes, interest charges on advance payments delivery charges, training and installation costs. However, other methods of equipment financing do not cover these costs.
Financial institutions offer a range of flexible equipment financing options. This is especially true when it comes to leases as they can be customized to specific cash flow, tax and accounting needs. The range of available options includes full payout loans, FMV (fair market value) and capped FMV leases.
4. Equipment Life Cycle Management
One of the most strategic advantages of equipment leasing finance is managing obsolescence. While the risk of ending up with obsolete equipment is invariably higher for IT related equipment than heavy construction machinery, it can be eliminated by opting to lease financing since most agreements allow for fast and easy equipment updates.
Furthermore, most companies offering equipment finance collaborate with vendors and customers to “right size” equipment by facilitating trade up o structuring co-terminus transactions to ensure the business gets the required equipment. Most financiers also handle equipment ownership burdens such as disposal when the time to upgrade comes.
5. Efficient Asset Management
This is another important benefit offered by most forms of equipment finance. Asset management is designed to ensure that equipment is not over-utilized or underutilized in operation. The program tracks individual pieces of equipment throughout the life cycle from delivery to installation, maintenance, use and finally, un-installation and disposal.
6. Better Expense Planning
Consistent budgeting and cash flow maintenance is a key concern for many companies. Rather than huge capital outlays that cause significant fluctuations in the company’s budget, equipment funding allows for more balanced expense planning. Full equipment loans and payout leases allow the borrower or lessee to factor in depreciation on acquired assets during tax calculations. On the other hand, operating FMV leases allow the business to take lower payments but without depreciation. Taking a loan allows businesses to lock their payments for the asset’s expected life, while leasing offered lower expenses throughout the expected duration of use.
7. Business Cycle Flexibility
This is another key factor in construction equipment financing. Some leases can be customized to allow for reduced monthly payments in the initial period of the project when the equipment is yet to register any revenue for the business. Payments can also be adjusted to factor in seasonal market fluctuations and circumstances being experienced by a particular business.
8. Equipment Expertise
Unlike other financial service providers, construction equipment finance companies are experts in construction related equipment and offer certain specialties. Over time, they have developed special relations with distributors and manufacturers specialized in certain industry categories of equipment types.
9. Up to Date Technology
To remain competitive, businesses have to take advantage in the new features, innovations and performance benefits that new equipment offers. Equipment financing makes it possible for them to acquire newer, more efficient equipment that may otherwise not be able to purchase due to prohibitive costs.
10. Increased Speed and Convenience in Equipment Acquisition
In most cases, the execution and completion of equipment finance/lease transaction takes a fraction of the time required for conventional financing options.
Equipment financing helps businesses achieve a more attractive balance sheet. Taking the option helps business reduce debts related to equipment acquisition, which is a huge benefit when it comes to secure future funding for the business.