Equipment is the backbone of business across industries—imagine a moving company without a truck, a bakery without an oven or a demolition contractor without a bulldozer—but purchasing equipment out of pocket is expensive. The significant upfront cost of a dump truck, HVAC or security system, or commercial refrigeration unit can have a severe, negative effect on cash flow, particularly for companies in early growth stages or those looking to expand.
In addition to the cost of securing equipment, other scenarios can make managing cash flow difficult, including:
- equipment in need of repairs;
- the need for specialized pieces of equipment;
- larger projects requiring multiple pieces of equipment; and
- a natural disaster or operating accident.
These unexpected costs can liquidate cash set aside for hiring, new product development, marketing or expansion. Building and construction companies face not only a high cost of equipment, but also specialty equipment needs for various projects and the threat of unforeseen costs.
The Promise of Equipment Finance
So, how can building and construction companies successfully manage cash flow while securing the equipment they need? Bank loans are seldom the answer. Only 3.7 million of the 36 million U.S. businesses that need equipment can get bank financing, including small and mid-size building and construction firms. Banks see these ventures as risky investments, preferring to lend to established business owners with higher credit scores. As a result, many contractors find themselves at a dead end with the traditional financing process.
Equipment financing is an alternative financing method that allows business owners to preserve cash for strategic investment or a rainy day, while securing the latest and greatest equipment they need to get the job done. Financing equipment in the form of a lease or a loan puts equipment to work for the company without a major upfront capital investment.
In addition, equipment finance provides four direct advantages for the building and construction industry.
Equipment Financing in Practice
- Avoid hidden costs. Financing equipment preserves cash not only in spreading out the cost of the equipment itself, but also in covering the hidden costs of delivery, installation and maintenance. Leasing in particular includes everything it takes to get the equipment up and running, from signature to the first highway project and beyond.
- Preserve cash for growth initiatives. Financing equipment allows for a much stronger cash flow, with cash on hand for investment into other growth initiatives, such as product development or sales and marketing. It also allows companies to make strategic hires or avoid embarrassing layoffs. Nothing fuels success like success.
- Realize tax advantages. Cash equipment purchases are made with after-tax dollars, while monthly lease or loan payments are considered a pre-tax business expense. This means financing equipment can help preserve cash by reducing taxes and increasing profit margin.
- Simplify accounting. Monthly lease payments show up as a single line item on the balance sheet. The time saved on bookkeeping can be a real cash advantage for the business.
Imagine the owner of a $5 million building and construction services company scores a larger than normal project. To complete this project successfully, the company will need five new trucks, four pieces of specialized building equipment and an expanded crew. Without a perfect credit score, it is nearly impossible to secure the equipment necessary for this project.
With equipment financing, there’s no need to forfeit the opportunity. Equipment financing would allow the contractor to finance every piece equipment needed, resulting in the cash flow required to service the debt and handle expenses associated with the expansion and hiring new workers.
In this situation and many like it, equipment financing supports a firm’s growth and longevity. To manage cash flow effectively, it’s critical to explore options beyond the bank.
Vernon Tirey is co-founder and CEO of LeaseQ. For more information, visit leaseq.com.