Financing your equipment in today’s environment
After the global economic recession, it’s hardly a surprise that many Canadian companies are sitting on older or outdated equipment – especially heavy equipment. Investment in such assets would have been especially tough to digest if the economic recovery was not going to be long lasting.
But now, with positive economic figures continuing, many companies are reaching an inflection point where it no longer makes sense to forestall the inevitable.
Here in Canada, demand has been fairly persistent in sectors that rely on equipment, and the longer term outlook is even more attractive. Take mining in the north, where metal and non-metallic mineral output is expected to grow 91% from 2011 to 2020, or about 7.5% compounded annually. Forestry is getting a big lift from lumber prices, which have climbed to their highest levels in eight years. Even construction looks primed to stay steady, buoyed by private sector building and public infrastructure maintenance.
Those developments bode well for the Canadian economy and companies looking to expand, and many firms will likely need to replace at least some of their aging equipment in the coming year to remain competitive. Equipment can’t be used when it’s in the shop, and the repair bill isn’t the only cost – the prospect of losing out on new business looms much larger.
The flexibility factor
When faced with such a decision to replace equipment in the past, many firms have simply walked into an equipment dealer and written a cheque or used valuable bank lines to pay for new machinery or technology. There are several reasons why this makes little sense in today’s operating environment. First, interest rates are at historic lows and likely to remain at these levels for at least another year or two. In fact, with inflation remaining muted, leading economists predict the Bank of Canada will leave interest rates right where they are for the balance of 2013.
Second, and perhaps more importantly, there’s a stronger business case for companies to hang onto the cash they have rather than spend it in the absence of a sharp rebound in economic activity. In this sense, financing not only provides a low-cost vehicle to expand your business, it also provides much-needed flexibility.
Leasing, in particular, makes a lot of sense for equipment buyers right now. For starters, a fair-market value lease reduces your up-front cash component and allows you to pay for only a portion of the total asset during the term of the lease, lowering your monthly payments. When the lease is up, you can either return the equipment or purchase it at the current market value.
As is the case with IT upgrades, leasing offers equipment users the opportunity to take advantage of the latest evolution in product offerings without being forced to sell their existing equipment on the secondary market. And, like IT, investment in equipment for their daily operations are beginning to migrate to lease packages that include ancillary services that go beyond the up-front purchase price, such as those that include extended warranties or replacement parts.
Finally, there is the additional benefit of flexible payment structures. Many companies can take advantage of the ability to lower their monthly payments during seasonally slow times or while they are waiting to be paid. This feature allows companies to make larger payments when equipment is operating and bringing in income, and reduce those payments during downtime or slower seasons.
Not just any lender will do
In addition to considering financing over outright purchases, equipment users should also put some time into choosing their financing partner. Many companies walk into the bank where they have existing relationships and simply ask for a loan or what financing may be available.
The problem is that many banks only recently started expanding into equipment financing programs as a way to help them offset pressures created by the low-interest-rate environment. As a result, they may not be in a position to deliver funding quickly, nor do they have the requisite sector experience to proactively help companies with their financing needs. The same is true for any lender who promises you the best financing rate to win your business in the short term.
Company executives in charge of purchasing decisions would be wise to avail themselves of all of the financing opportunities outside of such generalized, mass-market channels. Many don’t realize that specialty lenders exist whose expertise in their specific markets can generate significant time savings and other benefits. For instance, other lenders without business-specific expertise can add layer upon layer to the credit approval process as they work to try to figure out the business model. By comparison, lenders with expertise in the industry can turn approvals around quickly and get equipment into the buyer’s or lessor’s hands much faster. This benefit is critical in the equipment space given the need for companies to move nimbly once a competitive bid is accepted.
This means that when considering a lender, you should examine their infrastructure and personnel investments in your industry area. Examine the credentials of your loan officer and see if they’ve worked with others in your industry. If they haven’t, chances are greater that the loan or lease may take longer to close than they promise.
It’s important that users of heavy equipment put themselves in a position to benefit if and when conditions pick up even more. Financing your equipment upgrades now, rather than later, will help put you in that position, while keeping your options open and maintaining your cash for strategic business investment.
Blake Macaskill is Managing Director of CIT Canada. In this role he leads the development and execution of CIT Canada’s growth strategy and oversees the Canadian businesses of CIT Global Vendor Finance and CIT Corporate Finance.
Macaskill has more than 20 years of experience in the financial services sector, most recently with De Lage Landen (DLL), a subsidiary of Rabobank, where he had responsibility for their office technology business in Canada and led change management in the organization. Prior to DLL, he held senior positions with GE Capital Vendor Finance and GE Capital Fleet Services.