How construction businesses manage risk related to their equipment fleets is particularly important because of the significant effect equipment has on operating costs and company productivity.
Equipment financing is an essential risk management strategy that allows construction businesses to better manage or transfer many of the risks related to their equipment fleets.
Equipment-Related Risks Contractors Face
Equipment financing is more than a financial transaction to acquire a needed capital asset. The following examples show how equipment financing addresses many areas of fleet risk management:
- Risk of equipment ownership. The elimination of the risk of ownership with equipment financing is a top benefit that’s tailor-made for the ups and downs of the construction industry. After being hard hit by the recession, most contractors learned first-hand to make money by using equipment, not necessarily by owning it. No smart contractor can afford to have capital tied up in an asset that isn’t productive or generating revenue. With financing, the risk of ownership of often costly construction equipment is assumed by the lessor.
- Future growth requirements. Being caught short when construction demand increases is as great a business risk as having equipment sit idle. When new projects come up, leasing, rentals or other financing enable contractors to acquire equipment, and to access more and better equipment than they could have without financing. It is more feasible to make monthly payments than to make a large cash outlay for equipment up front.
- Capital preservation. No business should unnecessarily risk owner or shareholder capital. Terms are available in which it is possible to arrange 100 percent financing of equipment with no down payment. This preserves capital for other uses or for maintaining equity ratios on financial statements.
- Business expense planning. Keeping a handle on expense planning and cash management can be an issue because of the seasonal and project fluctuations many contractors experience. Financing equipment helps maintain cash flow and greater certainty in budgeting by setting customized rent payments to match cash flow.
- Project-specific equipment needs. A 2014 industry survey from Wells Fargo Equipment Finance showed that two-thirds of contractors cited the need for project-specific equipment as the reason they rented instead of purchased equipment. Financing eliminates the risk of keeping an asset that may not generate revenue once a project is completed.
- Equipment maintenance. Equipment maintenance and repair costs are significant concerns with construction fleets. When acquiring equipment through financing, most maintenance agreements can be bundled into the initial lease contract, keeping an even payment stream for the contractor. Equipment finance companies are motivated to ensure their assets are well maintained in order to protect their resale values; at the end of the lease term they will want to either sell it or lease it again.
- Aged or obsolete equipment. With older equipment, the tendency can be to keep it beyond its useful life to get another year out of it. With that tendency comes additional maintenance and potential loss of worker time and productivity if the equipment breaks down. Equipment financing can facilitate trade-ups and other replacement options.
Equipment financing provides flexible options and a wide range of benefits that can address the risk management objectives of most construction businesses.