Expert Tips for Construction Equipment Financing

Selecting the right equipment financing products and services for your company can mean the difference between succeeding or failing as a business.

So it's important to get it right. Here is an overview of products and services available for financing construction equipment, along with some tips designed to help you make the best choices for your business in today's rapidly changing environment.

Retail Loans

Retail loans-or more precisely, retail installment sales contracts-are the traditional method for acquiring new equipment, because you can structure payments over a specified term. Many financing firms with construction industry expertise now offer flexible payment schedules that match the customer's income and cash-flow situation. So be sure to ask for flexible payment schedules that can be timed to your cash-flow needs-annually, semi-annually, quarterly or monthly.

Different loan types that are currently available include:

• Split-rate financing-Sets specific rate changes during the contract period that lowers the initial payment and reduces your interest expense
• Fixed-rate financing-Locks in the special lower rate for the entire term of the loan, protecting you against rising interest rates
• Variable-rate financing-Offers rates that reflect current market trends along with interest-rate caps to limit risk; payments remain the same until the final payment, which reflects interest-rate adjustments
• Equity plans-Require little or no initial investment allowing you to build equity early in the contract to cover the down payment
• Skip-payment plans-Align payment schedules to your seasonal income flow

Leases

Leases are one of the best financing tools for businesses that require more productive equipment for less money. This is because with leases, you pay only for the use of the equipment, so you can benefit from the latest equipment technology while conserving capital.

Leases offer many advantages because they can be structured in a variety of different ways. Options can range from twelve to sixty months, and from 300 to 2,000 hours per year. Leases can even be customized to match the cash-flow requirements of your business.

The most common leases are:

• Operating leases-Can help you expand your fleet without having to make a big initial investment. After the lease term, you have options-you can purchase, re-lease, finance or turn in the equipment and walk away. Tax savings and an initial outlay of only the first-month's payment make this a good choice for businesses seeking to conserve their cash flow. Operating leases are available for new and select used equipment.
• Finance leases-Provide many of the advantages of ownership. You can start building an equity stake in the equipment from the first down payment or trade-in. And, at the end of the term, you can choose to return the equipment or exercise the option to purchase.

Leasing also offers other advantages for certain businesses, such as fewer liabilities on the books and potential tax benefits.

"Leasing is an increasingly attractive option for our customers," notes Larry Self, Leasing Director for CNH Capital. "In fact, loader backhoes are now the No. 1 leased product in the construction market for our company, followed by skid steer loaders.

"This is happening because customers can use the equipment for a very low payment, and their payments are fixed for a given lease term. Then, in three years, when maintenance costs begin to climb, they can return the equipment and begin a new lease with a brand new machine."
 

Rentals

Renting is used primarily to supplement existing fleets for short-term project work, but in today's environment, rent-to-own programs are popular for acquiring equipment. Some of these programs can be very flexible and competitive. But because leases are so flexible, they offer many of the same advantages of Rent-to-Own.

Protecting and Maintaining Your Equipment
Once you've acquired your equipment, it's very important to protect and maintain your equipment assets. Insurance and equipment protection products you'll want to consider include:

• Physical Damage Insurance-Provides comprehensive coverage to repair or replace new or used equipment that is lost or damaged.
• Credit Life Insurance-Helps pay off the balance due on the customer's financed equipment in the event of the insured's death.
• Loss Damage Waiver-Helps protect rented equipment against most causes of direct physical loss or damage during the term of the rental agreement.

Many financing firms will blend the costs for these programs right into the retail payments.

Another major consideration is equipment maintenance. For your day-to-day parts, service and rental needs, dedicated commercial revolving credit accounts are increasingly popular. That's because they offer seasonal specials, free up other credit lines and help you track your monthly expenses.

Cost Management Options

There's an expanding list of ways to help reduce unforeseen equipment expenses. Popular choices include keeping equipment new enough to be under the manufacturer's base warranty, leasing and using extended service contracts.

All have their advantages. Keeping new equipment gives you the benefits of full warranty plus depreciation deductions. Leasing offers set expenses that can be factored into your budget, and it's a good way to have equipment available for a specific time frame without a long-term obligation.

Service contracts are evolving from simply being a way to protect your equipment beyond the manufacturer's base warranty period, to financial tools that can be a valuable part of your cash-flow projections.

Purchased Protection Plans, for example, help protect eligible new and used equipment beyond the manufacturer's base warranty period. Plans can be purchased at the time of the equipment purchase, at any point during the base warranty period-even after the base warranty expires, although additional charges and equipment testing may apply.

Purchased Protection Plans:

• Offer plan options and deductibles that can be tailored to best fit your needs and budget
• Provide dependable service for eligible repairs using genuine parts from the original equipment manufacturer, installed by authorized service technicians
• Can be transferred to a new equipment owner, helping to enhance the equipment's resale value
• Are available for eligible new and used equipment
• Protect equipment beyond the manufacturer's base warranty period

Such plans include a wide range of payment options that can also help you with your annual budgeting. As with equipment insurance, you can purchase a plan when you purchase your new equipment, and add the cost to the retail contract as part of your overall loan expense. Or, if you pay cash, you're paying in today's dollars for a service that could benefit you up to five years later.

Consider the following when shopping for a Purchased Protection Plan:

• If you initially plan to keep the machine only for the term of the manufacturer's base warranty period but later decide to keep it longer, some plans are available for purchase at any time up to four months beyond the expiration of the manufacturer's base warranty period. Assuming a two-year new-machine base warranty, this gives you up to three more years of extended warranty protection against the risk of major repair costs.
• Your cash-flow projections for equipment enrolled in a protection plan only need to include maintenance and depreciation expense plus an estimate for a few deductibles, if you care to be that precise. For example, a $12,000 shop bill for eligible parts and repairs will cost you only the amount of the deductible, which you can select at the outset of the plan.
• Plans are available for most brands of eligible used equipment. This gives you the benefit of a reduced equipment purchase price, compared to new, with the advantage of protection against unforeseen expenses.

Bottom-Line Implications

How to decide which purchasing method is right for you? Whenever you acquire new equipment, you need to consider the financial impact that purchase has on your business-such as taxes, your balance sheet and cash flow.

That is why it may be worth your while to review the new tax incentives the United States government has provided for customers who buy equipment in 2008.  The Economic Stimulus Act of 2008, signed into law by President Bush on February 13, 2008, includes several important business-related tax incentives for customers to invest in equipment.

• Expanded Expense Election-The expanded Section 179 Expense Election allows you to deduct up to $250,000 of the expense of an asset (subject to the maximum investment) plus the normal first year's depreciation. The new Section 179 deduction limit is nearly double the prior limit, and the maximum investment limit has increased from $510,000 to $800,000.
• Bonus Depreciation-The new law includes a new 50 percent bonus first-year depreciation that applies to eligible equipment purchased and placed into service in 2008.

The new tax rules let you deduct up to $250,000 "dollar for dollar" for eligible equipment purchases of up to $250,000. If you buy beyond $800,000 worth of equipment, the deduction declines "dollar for dollar" to the point where, at purchases of $1,050,000, your Section 179 deduction is zero. This is also subject to taxable income.  For example, if you are acquiring $250,000 in eligible assets with the enhanced section 179 election you could potentially deduct up to $250,000 in year one.

Likely the most significant change is the 50 percent bonus first-year depreciation. It allows you to deduct 50% of the eligible assets value in the first year. For example, if you are acquiring $2 million in eligible assets, with the 50 percent bonus first-year depreciation and the normal first-year depreciation, you could potentially deduct up to $1.2 million in year one.

So if you're a person who wants to realize this year's profits before you commit to equipment acquisitions, you lose significant tax deductions, right? Not necessarily. Your equipment financer may be able to structure a lease that lets you acquire and use the equipment now, then purchase the equipment later.

"This could give you the benefit of deductible lease payments while at the same time buying down the cost of the equipment through lease payments," explains Tim Biewer, director of marketing for CNH Capital.

Then, by purchasing the equipment later, you may gain the full Section 179 Expense Election and normal depreciation allowance for the year, depending on the amount and timing of the purchase.

But, if you need equipment, purchasing it or leasing it can reduce the amount of tax you owe this year and have you better positioned to work more efficiently.

Buying equipment is major business decision, so it's important to choose your machinery, and your financing options, wisely. Take the time to talk with your tax or legal advisor about how you can gain the most value from this year's tax environment. Analyze all scenarios. And be sure to work with an experienced financing professional who can provide you with a complete range of innovative financing solutions.

Shopping for a Financial Services Provider

Your equipment financing resource is a major partner in your operation, so you'll want to consider more than the rate when reviewing your financing options. How is the partnership working out for you? Does your lender understand your business? How convenient is the relationship?

To help you weigh your options, here's a "Top 10" checklist:

What level of service does your financing firm offer?  Your time is money, and when you need an answer you usually need it now, if not sooner. Does your lender understand this?

• Can you have your payments automatically deducted from your account? Chances are, you already have far too many details you have to keep track of. Automatic deduction of your payments can mean peace of mind, and one less detail to worry about.
• Is there a toll-free number and secure website you can use to access your account? This is another one of those details that you may take for granted if you have it, but if you don't, you will sorely miss it. It's your account and you should be able to access it easily and securely.
• Are credit approvals prompt? Does the lender expedite the approval process, or do you feel you're part of an impersonal process that drags on and on?
• Does the lender offer options such as fixed, variable or split rates? The more options that are available, the better you can tailor the loan to the needs of your operation.
• What about physical damage insurance? You'll need this coverage. Can you include it with the retail installment sales contract or lease?
• What other types of equipment protection can the financing source provide? Credit life insurance and extended protection plans are two important coverages you won't want to be without.
• If you're buying used equipment, can you purchase an extended protection plan from the lending source? Providing a reliable source of service is vital, and you're a step ahead if you can purchase an extended protection plan from your financing source.
• Does the financing firm offer any waiver of interest or low-rate financing options? The more options that can help you get the best rate possible, the better.
• How well does the lender understand your needs? Only you can judge this intangible, but it's important. You'll be partnering with this lending source at least for the life of your loan. Is it a good fit? As you're considering your financing options, be sure to check with your equipment dealer. Along with helping you with your equipment needs, your dealer can also fulfill your financing needs.

Editor's Note: The tax information contained in this article is for informational purposes only. In addition, some states may not allow the additional deductions under the Economic Stimulus Act of 2008. Be sure to take the time to talk with your tax or legal advisor about how you can gain the most value from the current tax environment.

Article provided courtesy of CNH Capital, the financial services business of CNH Global N.V. More information about CNH Capital can be found at http://www.cnhcapital.com/.

Construction Business Owner, June 2008