As Demand for Construction Rises, Contractors Should Explore Equipment Financing Options
As companies look to acquire equipment in response to industry optimism, many seek financing through leases and loans, which offer tax benefits and flexible payment options. When considering the best way to finance equipment, companies should seek a strategic partner with deep industry expertise and the ability to provide extensive asset class and collateral experience to guide financing options based on the firm’s financial goals.
EQUIPMENT FINANCING PROVES ADVANTAGEOUS AS CONSTRUCTION COSTS RISE
Small business lending hit a record high in May, according to the latest monthly report by PayNet, which tracks small business credit. Construction lending growth stood out among sector leaders. As noted in an Oldcastle Business Intelligence report, smart financing will help companies adjust to construction costs that rose 3 percent in 2017 and are expected to climb an additional 3 percent this year.
As such, the Equipment Leasing and Finance Association’s latest monthly index showed new business within the $1 trillion equipment finance sector has increased 7 percent in the first five months of 2018. And despite rising interest rates, companies continue to take advantage of tax benefits to acquire equipment, with expected steady conditions auguring well for the balance of 2018.
The Tax Cuts and Jobs Act—which was signed late last year and outlines the benefits of equipment ownership and how that translates to financing structures—offers additional advantages to companies looking to procure equipment. Under Section 179 and Bonus Depreciation, the new law increases the amount of allowable deduction from $500,000 to $1 million and increases annual equipment purchases for eligible businesses from $1 million to $2.5 million. It also increases the bonus depreciation of new and used equipment that business owners can expense from 50 percent to 100 percent for equipment purchased between Sept. 27, 2017, and the start of 2023.
FLEXIBLE FINANCING SOLUTIONS
Unlike purchased equipment, which requires an upfront use of cash or credit, equipment leasing offers the flexibility necessary to provide customized financing solutions. By working with a committed financial partner that understands the business and is reliable and trustworthy, companies can engage in leases that work best for their business.
In a tax-oriented lease, the lessor claims the tax benefits of ownership through equipment depreciation deductions, but passes those benefits through to the lessee in the form of reduced payments, effectively delivering the lowest rate possible. One example is a fair market lease, which comes with an end-of-lease option that lets the lessee return, re-rent or buy the equipment at the current market value. Thus, equipment can be traded or upgraded for new equipment. With a tax-oriented lease, a company may have the opportunity to extend its lease term and reduce monthly payments to further increase cash flow.
Construction companies also can choose a capital lease, which works well with longer-lasting equipment, such as a truck expected to run for 10 years. Capital leases tend to be more inclusive than normal fixed-rate loans because they take other associated costs—such as sales tax and the Federal Excise Tax—into account. Banks financing equipment through loans typically do not. These leases, which are considered tantamount to ownership, also grant the depreciating asset benefit as well as the opportunity to purchase the equipment for a nominal cost after the term ends.
TERM LOANS TO PRESERVE CASH
Many construction contracts run from three to five years, which can create problems for financing as revenue streams may fluctuate. Companies that are expanding, replacing or servicing contracts may want to structure payments to synchronize with revenue streams, helping preserve cash flow.
Step payment programs are useful for companies that experience a seasonality influx or in situations where the equipment’s productive use increases or decreases over time. Payment structures in step programs generally are aligned with the cash inflow associated with the use of the equipment. In a step-up program, smaller payments are made in the beginning for a specified period, with payments increasing over the term. And in a step-down program, larger payments are made in the beginning with payments decreasing over time.
Interest-only payment options are advantageous for construction companies looking to acquire additional equipment to support a new contract. This option allows the lessee to suspend the combined principal and interest payment for an agreed upon time, and then begin full payments as cash flow builds.
Anthony Sasso. Reprinted from ConstructionExec.com, July 30, 2018, a publication of Associated Builders and Contractors. Copyright 2018. All rights reserved.