Equipment Financing to Manage Business Stresses
by Ralph Petta
April 8, 2010
Businesses have been facing
unprecedented challenges trying to keep afloat and operate in the worst economic
conditions of most of our lifetimes. Weak consumer demand, decreasing inventory
levels, aging equipment and tight credit markets have had many businesses
hobbled and waiting for signs of economic recovery. A recent study on the small
business outlook for 2010 from CIT and Forbes Insights reported that 71 percent
of small business owners agreed that they are working harder and longer to run
their businesses.
Evidence of optimism for the coming
months is encouraging, however. The CIT/Forbes Insights study also reported that
60 percent of small business owners expect their revenues to grow or grow
significantly in 2010, while a Duke University/CFO Magazine Global Business
Outlook Survey for the first quarter of 2010 reports that chief financial
officers expect 15 percent growth in earnings and 9 percent growth in capital
expenditures this year. These signs of optimism, while welcome, create more
uncertainty for businesses.
Not knowing what the future will
hold, smart businesses need to position themselves to take advantage of
opportunities. Clearly, there’s a need to fund capital expenditures to acquire
the equipment needed to operate and grow their businesses to meet not only
today’s challenges, but the pent-up demand that is expected to emerge once the
economy grows again. Equipment leasing and financing plays a significant role
in helping all types and sizes of commercial businesses in the United
States acquire the equipment they need, and its
benefits provide the flexibility to manage business stresses, whether in times
of uncertainty or prosperity.
Tight
Availability of Credit
In the current economic environment
where traditional banks are unwilling or slow to extend credit, equipment
financing is a key option for businesses to consider. The Duke/CFO Survey
reported that 70 percent of chief financial officers at small and midsize
businesses report that credit conditions are worse or much worse than 2008.
Despite efforts such as those by the Federal Reserve and other regulators
focusing on initiatives for banks to extend credit and the Obama Administration to increase funds for Small Business
Administration (SBA) loans, a
Discover Small Business Watch survey from February 2010
reported:
* 70 percent of small
business owners say federal stimulus efforts have had no impact on their
businesses.
* 76 percent of small
business owners are “not very confident” or “not at all confident” that the
federal government and Congress can address the needs of U.S.
small business owners.
* 91 percent of
business owners say that they have never applied for an SBA loan.
By comparison, credit approvals in
the equipment finance industry, historically higher than those for bank loans,
have been improving steadily, according to data from the Equipment Leasing and
Finance Association. Access to credit is just one of the many benefits equipment
financing provides to manage in an uncertain business
environment.
Equipment Finance Benefits
In addition to greater credit
availability, equipment financing is tailored for critical business
considerations, including cash flow and future capital necessary for future
growth. The CIT/Forbes Insights study reported that in 2010, 50 percent of small
businesses plan to invest in growth and expansion, and 50 percent also plan to
hold on to their cash instead of reinvesting it in the business. Equipment
financing can help businesses meet these goals and better manage their equipment
acquisitions through the following benefits:
Flexible
Financing
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 of the customer. They range from fair-market
value (FMV) lease transactions and capped FMV leases to full payout
loans.
100 Percent
Financing
A lessee or borrower may be able to obtain 100 percent
financing of equipment. Costs include hard costs such as the equipment and soft
costs such as shipping and taxes, design costs, installation costs,
transportation fees, training fees, software, and any service contract fees.
Improved Expense Planning and
Business-Cycle Flexibility
Financing equipment helps maintain cash flow and greater
certainty in budgeting by setting customized rent payments to match cash flow.
Some types of leases allow for seasonal business fluctuations, lower monthly
payments while a project is ramping up and revenue not yet being generated from
the equipment, and other specific circumstances your business may
experience.
Preservation of
Capital
Making large capital expenditures in equipment often
represents major financial risk, especially for small companies. Equipment
financing can help mitigate the uncertainty of investing in a capital asset that
may enable a business to achieve its desired return, increase efficiency, save
costs and apply capital to more pressing needs of its
operations.
Regular Technology
Updates/Obsolescence Management
By funding technology equipment under leasing, loan or
other financing, companies are often able to acquire more and better equipment
than they could have without financing. Certain leasing finance programs can
also allow for technology upgrades and/or replacements within the term of the
lease contract. Managing obsolescence is a strategic consideration for
businesses. The risk of owning obsolete equipment (for instance, IT equipment)
is eliminated if you use lease financing for your acquisition, since many
financing agreements allow for easy and fast equipment updates.
Relationships with Equipment
Experts
Some equipment finance companies are equipment experts
and offer equipment services that other sources of financing do not. Equipment
finance experts may have special relationships with manufacturers and
distributors. Many equipment financiers specialize in certain equipment types or
industry category, such as IT, office equipment, transportation, manufacturing
and medical, to name a few.
Dependable Asset
Management
Many financing companies can help track the status of
equipment, know when to upgrade or update it, and can provide services relating
to installation to use, maintenance, de-installation, remarketing and disposal
of the equipment.
Equipment
Disposal
Equipment management by a third party, such as an
equipment financing company, should enhance the ability of a business to focus
on its core operations. In the case of computers and other technology devices,
these companies may also help dispose of such equipment. This service should
prevent the lessee or borrower from incurring legal penalties for improperly
disposing of electronic assets, which is often regulated by federal, state and
local governments.
Risk
Management
Equipment purchases involve risk to the owner—from
equipment expertise to capital outlays, 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.
At a time when businesses are weighing mixed economic signals and
facing tremendous business stresses, acquiring equipment through financing
offers valuable financial and strategic benefits. Businesses who want to learn
more about equipment financing may visit www.EquipmentFinance101.org, an
informational website that has types of financing, a glossary of terms, a lease
vs. loan comparison, questions to ask when financing equipment and other
resources.
Ralph Petta
Ralph Petta is interim
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. For more
information, please visit www.ELFAOnline.org.
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