Understand and Utilize these Evolving Trends in Construction Machinery Financing

All construction businesses require equipment in order to operate, and in the current volatile economy your equipment acquisition strategy is critical to successfully running your business and your bottom line. The construction industry’s equipment-intensive nature can require a variety of equipment types from heavy grade to compact equipment and attachments, in addition to non-construction equipment needed to run the business, such as office equipment and IT.

Equipment financing is a strategic financial option for businesses to consider regardless of the economic climate. But, it can take an increased role during a downturn when maintaining cash flow, preserving capital, obtaining flexible financial solutions and other benefits of financing are even more critical for helping businesses ride out the storm. A greater understanding of the benefits, trends and outlook for equipment financing will enable you to get the most for your business without hamstringing your budget or your company’s future. Remember, you make money by using equipment, not necessarily by owning it.

　　Construction Equipment Financing Activity

The current market environment finds equipment financing as vital and available as ever, enabling construction businesses to secure the assets they need. The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI), which reports economic activity for the $628 billion equipment finance sector, showed new business volume for September 2011, the latest data available, was up 25 percent over the same period in 2010.

However, new business volume of equipment financing for the construction industry remains weak. MLFI data shows that construction has consistently led among underperforming sectors for equipment finance activity throughout 2011. Also, according to the ELFA’s 2011 Survey of Equipment Finance Activity financing for construction equipment fell slightly to $6 billion in 2010 from $6.1 billion in 2009.

Construction Equipment Prices Rising

Market conditions for the construction equipment segment are still somewhat soft and are expected to remain soft for at least the next two years, according to the 2011 “What’s Hot/What’s Not” Equipment Leasing Trends Survey released by the Independent Equipment Co. in cooperation with the ELFA. Still, resellers are experiencing shortages in certain types of used equipment. This seems to be the result of declines in new equipment sales over the past two years. One equipment finance industry executive has noted that construction equipment experienced a 12 percent increase in value in 2011 over the prior year.

Rouse Asset Services Construction Rental Report for Sept. 2011 showed Orderly Liquidation Value (OLV) index values for used equipment across 14 major rental categories increased 1.4 percent in August 2011, and increased 6.7 percent for the six months ending September 30, 2011. Individual categories included excavators, which were up 1.8 percent month to month and 6.4 percent over the same six month period, and loader backhoes, which were up 2.7 percent month to month and 6.2 percent over the same six months.

Benefits of Equipment Financing In Uncertain Conditions

Overall, equipment finance industry executives cite uncertainty as the reason businesses are hesitant to invest in new equipment. Uncertainty has reduced spending appetites so that we are seeing an equipment “replacement” environment, rather than a growth or expansion environment. For businesses short on cash and uncertain about making large capital investments, they will find that equipment financing provides the

following benefits:

　　1. Enables expense planning

　　2. Maintains cash flow

　　3. Preserves capital

　　4. Requires no down payment, and

　　5. Can provide 100 percent financing.

The flexibility of equipment financing, especially leases, is another key benefit that can enable customized solutions for a business’s accounting, tax or cash flow needs. Leases are available that will allow for seasonal business fluctuations, lower monthly payments while a project is ramping up and the equipment is not yet generating revenue and other specific circumstances businesses may experience.

Availability of Credit

Access to credit is one of the many benefits equipment financing provides in a restricted credit environment. According to a study released in August 2011 by the National Small Business Association, 73 percent of small business owners report that their business had been impacted by the credit crunch. Among small business owners for whom capital availability has been a problem, 36 percent say that they have been unable to grow or expand the business. However, credit approvals in the equipment finance industry are historically higher than those for bank loans and have been improving steadily, according to data from the ELFA.

The risk of equipment ownership is a consideration for businesses regardless of business cycles. Investing in large capital expenditures represents a big financial risk, especially to small companies. Even with low interest rates that make purchasing attractive, the potential consequences of ownership can erode the upfront benefits. Risks incurred from managing assets, such as inconvenience, inexperience, obsolescence and loss of profitability, can be dramatically reduced through the transfer of equipment ownership to the equipment financing company. Financing removes many unnecessary risks, allowing businesses to focus on their core competencies.

Equipment leasing and financing plays a significant role in helping all types and sizes of commercial businesses in the United States to acquire the equipment they need with increased flexibility, regardless of business conditions. The cost and other obligations of equipment acquisition for contractors in construction and landscaping, in particular, make equipment financing a key option.

Businesses who want to learn more about how they can incorporate equipment financing into their business strategies may visit www.EquipmentFinance101.org. This informational website has a wide range of resources, including a review of the various types of financing, a glossary of terms, a lease vs. loan comparison and questions to ask when financing equipment.

William G. Sutton, CAE, is president and CEO of the Equipment Leasing and Finance Association, based in Washington, D.C.