Equipping Small Businesses for Success
By William G. Sutton, CAE
Most small businesses require equipment in order to operate, from computers to furniture to fleet cars, but simply don’t have many funding options. Aside from internally generated cash flow or credit lines, businesses interested in acquiring equipment require other choices for financing their capital spending. Many finance companies, from commercial banks to manufacturers and smaller, more specialized commercial finance companies around the country, offer a variety of options for small businesses who want to acquire equipment. Knowing the financing options available for equipment acquisition 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. Benefits of Equipment Financing In Uncertain Conditions The current market situation finds equipment financing as vital and available as ever, enabling businesses to secure the assets they need. The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index, which reports economic activity for the $521 billion equipment finance sector, showed new business volume for August 2011, the latest data available, was up 33 percent over the same period in 2010. Despite some gains businesses are experiencing, economic recovery is slow. For businesses short on cash, equipment financing offers the following benefits: • enables expense planning • maintains cash flow • preserves capital • requires no down payment • 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 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 a business 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 role of the equipment finance industry in providing credit to businesses has wider economic impact, since in a typical recovery most job growth is generated by small firms. Advantages for All Business Cycles In addition to market-sensitive considerations that make equipment financing attractive to businesses, its operational advantages provide benefits in all economic cycles: Access to Equipment Expertise Many equipment finance companies have special relationships with manufacturers and distributors. This expertise also enables the best possible lease payment terms since their knowledge and experience with various equipment types allow equipment finance companies to accurately set the residual rate—the value of the leased equipment at the end of the lease term—for your equipment type. Equipment Obsolescence Management Funding equipment such as IT, communications and medical/healthcare equipment through leasing, loans or other financing arrangements helps manage equipment obsolescence by enabling updates. Certain leasing finance programs can allow for technology upgrades or replacements, so the risk of being caught with obsolete equipment is lower with leasing than with other equipment acquisition methods. No-Hassle Equipment Disposal Financing also allows upgrading without having to manage equipment disposal and other ownership burdens. Particularly with computers and other technology devices, disposal can be a complicated issue, governed by federal, state or local regulations, which equipment finance companies are well positioned to handle. Better Risk Management for Risky Times 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. Outsourcing Equipment Management Businesses have cut back staff significantly over the last few years, and most businesses lack the resources or knowledge to efficiently manage and sell their old equipment and purchase new. The convenience of having equipment managed by a third party, such as an equipment financing company, essentially outsources the equipment management function. Valued Equipment Consulting Most importantly, the equipment financier can be considered a valued consultant, providing additional benefits through lifecycle asset management solutions. Financing companies can provide dependable asset management, which helps businesses track the status of equipment, schedule upgrades, and receive full equipment lifecycle services from installation to disposal. Equipping Business for Success 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 role of the equipment finance industry in funding the capital expenditures businesses need to operate and grow contributes not only to businesses’ success, but to U.S. economic growth. 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. ©Equipment Leasing and Finance Association 2011. Reprinted with permission.
William G. Sutton, CAE, is President and CEO of the Equipment Leasing and Finance Association, the trade association that represents companies in the $521 billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods. This year the ELFA is celebrating 50 years of equipping business for success. For more information, please visit www.ELFAOnline.org.