Making better decisions for equipment financing
By Seth Skydel
While equipment financing is always a consideration for agricultural businesses, it comes with new challenges as the economy and inflation drive up costs for both new and used machines.
“Companies in the equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods, work with customers in different verticals to structure financing and payment schedules,” said Ralph Petta, president and CEO of the Equipment Leasing & Finance Association (ELFA). “They are very flexible when it comes to working within a borrower’s payment capabilities and can address seasonal use and cash flow factors with variable payment options.”
Innovative and creative approaches to financing and leasing have always been essential in providing equipment funding, said Harry Fry, president of Harry Fry & Associates.
“Higher interest rates create a greater cost whether you’re financing new or used equipment,” Fry said. “With higher interest rates and equipment costs, companies need to maintain their good credit history and/or put money down for more favorable rates and palatable payments.”
Traditional approaches to equipment loans can be tailored to fit a company’s needs. Each of these equipment financing programs offers advantages, Fry related:
TERM EQUIPMENT LOANS take advantage of terms from 24 to 120 months, depending on the age of collateral. In lieu of a cash down payment, using the equity you have in free and clear equipment in your fleet is an option. There are various payment structures possible in a term loan to meet the needs of your company.
CUSTOMIZED EQUIPMENT LOANS can include a Delayed Payment Option for 60 to 90 days that enables time to generate revenue before your loan payments begin. A Step Payment Program allows for lower-than-normal payments in the beginning and then steps up to higher, regular payments for your remaining term. A Seasonal Skip Payment Program can be structured to fit the timing of your cash flow, including no payments or partial payments during off-season periods.
Fry also advised that different types of leases can be structured to provide for the use of equipment for a specified period, such as for a specific project, and can include the option to purchase the equipment, for a specified price, at some point during the term or at the end of the lease.
According to Fry, here are the basic equipment lease types:
FINANCE LEASE OR CAPITAL LEASE: A non-tax-oriented lease, which provides your company with a stated purchase amount at the end of the lease term ranging from $1.00 up to a percentage of the equipment cost.
TAX LEASE: An off-balance sheet lease which can help preserve your company's ratios and conserve capital. A tax lease provides for structured payments where you will only need the use of the equipment for a specified period. At the end of the lease term, your company has the option to purchase the equipment at Fair Market Value (FMV), return the equipment, or renew the lease and keep the equipment.
TRAC LEASE: A quasi- tax-oriented lease available for over-the-road, titled equipment structured with a residual, which is guaranteed by the lessee. Generally, the TRAC lease requires a payment in advance, conserving your cash outlay. At the end of the lease term, the equipment can be purchased for the guaranteed residual amount or returned.
In all cases, Fry noted, before considering which lease best fits your company’s business structure you should speak with your accounting and tax consultant to determine how leasing will impact your business.
To help equipment users effectively finance purchases and choose the appropriate option and terms that are right for their businesses, ELFA has compiled a list of issues to consider:
● Financing with no down payment. Unlike requirements of most traditional lenders, you may be able to arrange 100 percent financing, a key possibility to consider if cash flow is a concern to your business.
● Maintain cash. Equipment financing is a source of funding that lets you hold onto working capital so it can be used for other areas of your business.
● Manage risk. Equipment financing can help mitigate the uncertainty of investing in a capital asset your business needs until it achieves a desired return.
● Hedge against inflation. Instead of paying the total cost of equipment up front or making a large down payment, the stream of payments delays your outlay of funds. In addition, either a lease or loan can lock in rates so the finance company absorbs the devaluation of your payments over time due to inflation and other financial risks.
● Plan expenses for cash flow and business cycle fluctuations. Financing equipment helps maintain cash flow and provides for greater certainty in budgeting by setting customized payments.
● Keep up to date with new technology. Financing enables you to acquire more advanced equipment. Certain programs can also allow for technology upgrades and/or replacements during the term of the contract.
● Address tax considerations. Tax-oriented leases should produce lower payments since the lessor retains title and depreciation. Conversely, a conditional sale or loan enhances the tax benefits of higher deductions for the borrower.
● Leverage equipment expertise. The equipment financier can be a valued consultant, providing benefits that range from setting residual rates through lifecycle asset management solutions.
● Obtain the convenience of product and service bundling. Certain financial products allow customers to finance the entire cost of equipment, including installation, up-front maintenance, training, and software, in a single, easy-to-manage solution.
“Knowing the right questions to ask will put you in the strongest position possible as you acquire equipment,” said Ralph Petta. “That way you are able to make strategic use of your assets, especially at a time when businesses need every advantage to stay afloat and be competitive.”
Seth Skydel is a writer with 38 years of experience covering the trucking, utility, construction, and related markets.
