Cash flow may slow in a down economy, but companies must remain at peak performance in order to turn a profit. To do this, newer, more efficient equipment is often needed. Unfortunately, the capital investment required for these upgrades may not be available, especially in today's economic climate.
For example, one tried-and-true method for saving on expenses-as well as maintaining legal compliance-in the construction industry is weighing all materials on a truck scale. After construction vehicles are loaded with materials, a truck scale can be used to ensure each is filled to its proper capacity, reducing the number of trips required to and from the worksite. Conversely, the scale can also ensure that vehicles are not overloaded, which could lead to costly fines and increased wear-and-tear on vehicles-resulting in higher maintenance costs.
Truck scales provide precise load weights to ensure accurate transactions between the companies supplying and purchasing the materials used.
While a truck scale can provide years of reliable operation with repeatable results, it does require a hefty upfront investment-many scales are $35,000 or more, and projects could reach $50,000 including creating the scale's permanent foundation, as well as installation and calibration. This is far more than many companies can spare for a single purchase in this economy. Equipment leasing has proven itself as a valuable alternative, as it provides companies with a way to begin reducing expenses immediately, as outlined above, with little or no upfront cost. Just as a business wouldn't pay an employee for an entire year's work in advance, leasing allows companies to pay for today's equipment with tomorrow's profits.
Leasing can provide a far more feasible solution for many companies who require new equipment-due to expansion, cost cutting initiatives, replacing old equipment or the desire to increase overall productivity-but do not have the full amount of capital available. The combination of longer terms and flexible payment plans, providing more manageable monthly payments, have made it easier for companies to fit leased equipment into their budgets.
Even with capital available, many companies may select to lease equipment rather than purchase it outright. As revenue has decreased for most companies in the past year, it has become pivotal for companies to maintain cash balances and bank credit lines to cover fixed costs, retain good employees and continue to market their services. As leasing provides 100 percent financing, it frees up significant working capital for short-term cash needs.
Tax benefits are another reason many companies select leasing over cash or bank loans. Lease payments can be set-up as a direct operating expense, meaning they are paid from pre-tax dollars rather than after-tax profits. The result is faster write-offs, freeing up more capital in less time.
Leasing also delivers many benefits over bank loans for large capital purchases. It frees up bank credit for the short-term needs for which this type of credit is better suited. Leasing, conversely, is designed to act as an additional and separate line of credit-to expand, rather than restrict, financial resources. It also offers the flexibility of variable structuring options to assist customers in managing their financial responsibilities. For instance, payments may be tied to specific projects, or "stepped down" over time to mirror the declining value of the equipment, or "stepped up" to increase over time as more revenue becomes available due to the use of the leased equipment. Plus, leases offer fixed rates and do not require substantial down payments, compensating balances, financial ratios to be maintained or a blanket lien on the company's assets-all of which are common terms with bank loans.
Some finance companies offer lease options that allow customers to adjust the monthly payments seasonally to accommodate variances in cash flow. Lease options are also available in low initial payments, such as $25 per month for the first three months or $99 per month for six months. These arrangement offer companies the ability to begin reducing expenses immediately through their new equipment while deferring the lease expense until the costs savings become available.
Other ways equipment leasing provides increased flexibility for users is through offering various end-of-term purchase options, with leases available up to eighty-four months. A single lease can be used to finance multiple pieces of equipment from different vendors-including used equipment-simplifying financing by reducing all equipment expenses into one affordable monthly payment.
An additional benefit of equipment leasing is its convenience. Lease applications-some only a single page for transactions up to $75,000-can often be filled out and submitted online, and approvals can be granted in as little as a few hours. The entire lease can be completed electronically or by phone or fax, which helps expedite the process and allows companies to complete the necessary paperwork their own schedules.
Combined with the convenient monthly payments, adjustable seasonally when needed, leasing allows businesses to efficiently and cost-effectively obtain the equipment they need-while retaining crucial cash balances and bank credit lines.
Construction Business Owner, March 2010
