The construction sector is stabilizing following a period of rapid growth, with drivers of commercial construction remaining strong amid a thriving economy. While fundamentals are healthy, experienced contractors understand that whether a long phase of stability or a downturn is on horizon, it’s important to adjust their fleet management and business operations strategies accordingly.

Keep Fleets Fresh and Nimble Through Smart Diversification and Leasing

As economic expansion slows and the construction industry moderates, contractors are faced with uncertainty regarding whether the country is heading toward a downturn in the next few years or an extended period of slow growth. The good news is that many construction business owners and managers have begun to reevaluate fleet financing and diversification strategies to consider how they can be best positioned for either outcome.

During the last decade, many construction firms went from owning approximately half of their equipment fleet outright to owning closer to one-third, with the remainder being a mix of leased (typically on terms of three to 10 years) or short-term rented equipment.

Once the economy gained strength and the construction industry experienced significant growth, companies recognized that flexibility should always be a component of an equipment acquisition strategy. By diversifying fleet ownership, contractors can save costs, minimize risks and accommodate growth simultaneously.

Flexible operating lease (or true lease) structures also offer the bottom line benefits of low-cost fixed-term payments with the flexibility to defer the ownership decision until a later date. For the duration of the lease term, fleet managers can depend on a consistent monthly payment despite the fluctuations of increasing equipment costs.

As a result, owners and managers will have more time and resources to focus on increasing their workload and profits, which will become increasingly important as growth slows and competition for jobs rises.

As the industry continues to stabilize, construction firms likely will want to consider minimizing the short-term rental portion of their fleets. However, some situations may call for continued utilization of rentals to quickly scale up fleets; for example, when contractors are responding to natural disasters.

Consider Financing Software and Other Soft Costs

While heavy equipment can make up a large portion of a construction firm’s capital expenditures, many other costs go into operating a business. What some contractors are not aware of is that it is possible to finance many of these expenses—including maintenance, software, installation and training—along with the addition of equipment.

As recent expansion and merger and acquisition activity has led to rapid growth within the construction market, comprehensive, efficient and up-to-date software is more critical than ever to ensure streamlined integration for continued operational growth.

That said, the software itself—along with labor, consulting and travel costs—can carry a hefty expense. Construction companies should look to finance as much of these costs as possible and utilize their excess cash positions for working capital and potential acquisition-based growth, while the industry is trending upward.

Independent equipment finance providers can be a good resource for packaging the cost of installation and maintenance along with the software in one payment. When working directly with the vendor or a bank, firms likely will be restricted to financing far less of the overall software costs.

Adapt to Changing Regulations and Rising Interest Rates

Tightening banking regulations and rising interest rates could affect contractors’ ability to secure financing, and competitive terms, so it is important for owners and managers to remain informed regarding the potential impact of these changes.

Understanding the limitations of working with bank financiers, including the elevated criteria that firms must meet in order to qualify for loans and leases, many construction firms are turning from traditional lenders to independent finance companies that are able to look beyond the bottom line.

By identifying an independent finance company that specializes in the construction business, contractors can discuss their needs with a provider that understands the ebbs and flows of the industry. Thus, if a prospective borrower has experienced a down cycle, it won’t necessarily prevent it from securing competitive terms and rates.

There is no question rising interest rates will impact financing in the long term. While the frequency of increases has slowed in recent months, rates are anticipated to rise at least once more this year and again in 2020.

Therefore, locking in fixed-rate financing now in order to take advantage of historical lows is still beneficial. The ability to capitalize on fixed-rate options that most independent finance providers offer is another important consideration because most bank lines of credit are floating rate facilities where interest will likely rise over time.

A smart financing strategy that helps facilitate smooth operations and improve cash flow can position contractors for success, even as overall industry growth decelerates slightly. Remaining nimble as well as educated regarding the ability to secure attractive financing terms can help construction firms stay competitive and maintain growth or healthy operations for several years to come.