2020 has been quite a year. With the global spread of the COVID-19 pandemic and far-reaching lockdowns, businesses all over the world have had a tough time trying to keep their doors open. One industry that has taken a particularly hard hit has been the construction industry. Projects have had to be put on hold, timelines extended and reduced crews have crippled companies all over the world.
It is projected that the industry has declined from around USD11,217.4 billion at the end of 2019 to USD10,566.8 billion in 2020. With that being said though, recovery is expected to push the industry beyond the initial expectations.
So, even with the current economic difficulties construction companies face, there is a new wave of business expected. If you are a business owner of a construction company, you will naturally want to ensure that you are part of the wave, despite the economic downturn.
One of the most cost-heavy aspects of a business is equipment. Without this vital element, however, there is, unfortunately, no business and no operation. We thought we would unpack a possible solution to get you back into action: construction equipment financing. We took a look at what your options are and why it could be incredibly beneficial to your business. Let’s jump straight in.
What is Equipment Financing?
Equipment financing, especially construction equipment financing, refers to the types of businesses that provide construction companies with the needed capital to purchase the necessary equipment to keep their business running.
You can opt to go through a bank, a financial institution, or directly from an equipment company that will lease equipment to you. Leases are one of the most popular types of financing options as they provide the company with flexible and realistic options to acquire the equipment needed.
Construction companies, in particular, choose to finance the heavy machinery and tools, as well as the trucking and vehicles needed to complete projects. They can also take out operating leases for the much-needed office equipment like computers and printers to run the admin side of the business.
So, what are the benefits of financing equipment, and why would a company opt for this option, even if they have the capital available to buy equipment cash? We broke down the top reasons why financing, especially leasing, is incredibly beneficial to a company and why we recommend this option for business continuity.
Leasing Preserves Your Working Capital
The first, very crucial aspect of financing and leasing is the fact that you do not need to set aside a huge lump sum of money to acquire the equipment that you need. The total cost of the equipment is broken down into manageable, monthly payments for the company to pay off.
Naturally, interest and associated fees are added to the total cost, but it makes owning the equipment a lot more achievable.
It is highly recommended by financial advisors not to take big chunks out of your working capital for things like equipment. This capital is needed for the day-to-day expenses of the organization like wages and rent. Should the company be hit with a sudden, and unexpected downturn, like COVID-19, for example, this available cash could be the saving grace to keeping the company running.
Lease payments can be financially matched to the equipment’s productivity and financially speaking, offer less of a risk to the company.
Equipment Redundancy is Not a Factor
We can all agree that technology is evolving at a very rapid rate. Equipment that has been purchased two years ago might not be relevant or might already be outdated. Take a look at laptops, cell phones, and printers, for instance. This type of equipment has short life-cycles and will need to be replaced often for staff to remain productive and be able to keep up with technological developments.
Construction equipment is changing all the time. Tools are becoming smarter and making sure that the project can be completed with more accuracy, more efficiently, effectively and in less time with up-to-date equipment.
Not only can equipment become obsolete after a few years but companies can maintain their competitive advantage over other companies with the latest equipment. Many of them boast the latest tools and technology as a sales point to win over customers.
It is important, however, to know the difference in leases. Capital leases usually result in the company taking over the equipment and owning it at the end of the term. Operating leases, on the other hand, are the forms of financing where you can choose to return the equipment, lease a newer model, or re-lease the equipment for another period of time.
It Makes Sense On Your Books
Financially speaking, leasing is completely advantageous for a business. Leases are not recorded like normal equipment purchases and do not really impact the companies balance sheet, which is especially true in the case of operating leases. Because the company will be giving the equipment back to the lessor at the end of the term, the lease is recorded as a working expense and the company does not need to report the depreciation of the equipment.
In the case of owning equipment, it would be listed as a depreciating asset and is listed on the balance sheet at its historical cost amount. This is then reduced by accumulated depreciation to result in the net book value. Should the company choose to sell the equipment, it triggers a gain or a loss, depending on the difference between the equipment’s net book value and its sale price.
Leases, on the other hand, are recorded as liabilities and open the company up for more lines of credit from banks as well as investments. Because they present less of a risk than owning assets and are reduced monthly expenses, the lessee can seek other forms of financing without too much trouble.
Day-to-Day Equipment Management Is Reduced
When purchasing equipment, you take on all responsibility for the equipment. You will need to take care of the day-to-day maintenance and servicing of the equipment as well as ensure that the equipment is insured.
When you opt for the construction equipment financing option, those responsibilities are up to the owner of the equipment, the lessor. In most cases, regular maintenance and breakdown costs will be factored into the leasing amount and be a part of the monthly fee. But the lessor will need to take responsibility for it being completed.
A number of other costs can also be factored into the leasing fee and will not need to be completed by the lessee.
Training, for example, can be factored in. Should the staff of the lessee company need training on the equipment, this can be factored into the costs, and be done by the lessor. Other costs like transporting, installing, import fees, licensing, and legal fees will all be factored into the lease costs.
There Are Great Tax Benefits
As with your financial statements, leasing has numerous tax benefits. In most cases with leases, because of how they are reported on financial statements, you can actually claim back a significant amount from tax.
Lessees can firstly take advantage of capital allowances, but can also cover interest costs, client upgrades, reduce taxes on defaulting clients, and deduct maintenance costs. Even with the latest tightening of the leasing regulations in IFRS 16, lessees can actually walk away smiling.
But, just what does this mean? First of all, capital allowances allow you to deduct a percentage of the costs of the equipment from your profits on an annual basis. Capital allowances are applied in most cases with the purchase and financing of equipment. However, it might not be relevant in the case of an operating lease, but more so for a capital lease.
You can also claim back for interest paid on the equipment and in many cases, make back a substantial amount spent on the actual lease of the equipment.
Leasing Options are Flexible and Are A Great Option for Startups
Equipment leases are actually incredibly easy to apply for. They usually take a few hours to a few days to apply and get approved for. In most cases, leasing companies lease their own equipment and use it as collateral in case of any defaulting. Even financing companies who assist in financing the leases consider the equipment capital and are more willing to offer finance solutions.
This is therefore ideal for startups and new businesses, who are the most likely to need a lease to get the business started. Most leasing companies do not take the company’s credit history into consideration, especially if they are a new company. If the company is signing a capital lease, with intent to buy at the end of the term, the lease will most likely require a deposit, and the financing company might take the owners’ and directors’ credit histories into consideration.
You can usually negotiate various terms of the lease like the duration, deposit, maintenance and residual value at the end of the term. You can also negotiate the interest rates in most cases, but make sure you speak to a tax consultant in order to find the right interest rate to write off to tax.
There are a number of companies who you can approach for construction equipment financing, so it is important to do your research before settling on one. Make sure they are reliable, transparent and have a good history with clients. A great financing company should act as your partner throughout the process. Make sure you book a consultation with the company and provide them with a breakdown of your financial history as well as goals and strategic directory. The right company will work hand-in-hand with you, considering trends and risks in the market to provide the right financial solution.