Efficient and up-to-date equipment is vital to the supply-chain sector, but acquiring these tools often challenges small- to mid-sized businesses. Companies have to consider cash flow needs, flexibility, tax impacts and other factors — with heightened economic uncertainty amid the global pandemic. Business growth and stability pose a dilemma.
There’s no question that leading-edge technology, timing and scalability play key roles in an organization’s assets. However, the ways in which you choose to pay for new equipment and technology may vary according to your business objectives. More than ever before, the benefits of financing could have a significant positive impact on your goals and success.
A Strategic Tool
Especially in times of constrained capital resources, it’s essential to note that equipment financing is available right now, typically with no advance payment required. Further, financing offers unmatched flexibility. Through customized structures and a variety of payment plans and terms, financing can be a powerful tool to support growth in current conditions and beyond. Let’s take a closer look at these three features and other points to consider about equipment financing:
A lease can leave capital reserves intact — free to use for other investments and improvements, or to help you pivot quickly when unexpected events impact your organization or the broader economy.
Large capital outlays for equipment can present financial risk for supply-chain organizations to evaluate and manage. Equipment financing can help an organization manage the uncertainty of investing in equipment that contributes to achieving business goals and adjust cash spending for other imperative needs.
Leasing vs. Purchasing
Using fictitious figures, the following sample scenario illustrates how financing equipment can enhance cash flow, free capital reserves and support changing business needs in a fluctuating economy:
Suppose two similar companies each sought to acquire new equipment with a market value of $5 million in January 2020 to meet projected business needs. Company A purchased the equipment with $5 million from its reserves, and Company B entered into a customized lease to finance its use of the equipment over time.
Company A immediately reduced its available cash reserves by $5 million. Company B financed the equipment and maintenance costs over the useful life of the asset, resulting in monthly payments of $75,000, or $900,000 over the first 12 months.
If Company B pursued a lease payment structure while seasonality and unexpected economic events impacted its business, the potential impact on its liquidity due to changing market conditions may have been less.
If both companies faced significant, unexpected liquidity needs during the year, Company A may find itself less nimble because $5 million was spent upfront for its equipment. In contrast, Company B remains positioned well to sustain its current operations, adjust cash spending for other needs and adapt its business model to 2021 and beyond market conditions because it retained approximately $4 million in cash reserves that first year. Moreover, depending on lease terms and conditions, the ability to upgrade mid-term or return the equipment may be available and position Company B to continue to scale its business while reducing the risk of equipment obsolescence.
In an uncertain economy, most business owners opt for maximum control of capital equipment acquisition, use and disposition. Financing can help shape that strategy. With mid-term upgrades and the option to renew the lease, purchase the equipment, or return assets at the end of the term, the risk of owning obsolete equipment is lessened substantially.
Tax Appetite and Depreciation
For many supply-chain organizations, asset depreciation plays an important role in fiscal management. In fact, all equipment offers depreciation benefits. However, determining whether your organization can use all the depreciation requires consideration — especially true for equipment- intensive businesses.
Taxpayers who need depreciation’s sheltering effect may benefit from being the tax owners of equipment. You can accomplish this with a loan, installment payment agreement and some leases. However, on an after-tax cost basis, organizations that cannot fully utilize tax depreciation (or those subject to interest expense limitations) may find a tax lease more efficient.
Why a Tax Lease?
When compared to a traditional loan, tax leases typically provide favorable cash flows because the lessor monetizes depreciation and a residual investment in the form of a lower monthly payment. Tax leases also allow the entire lease payment to be deducted as an operating expense on the business’s tax return — a potentially critical consideration for organizations that wish to extend tax deductions over longer time periods.
Few, if any, other payment options offer equipment financing's wide range of benefits and flexibility. Though current economic conditions have negatively impacted many organizations, financing is a powerful source of alternative capital, available now.
Before beginning to acquire new equipment or assessing existing equipment, it’s essential to seek an equipment financing professional who has industry expertise, a proven track record in lease structuring and a clear understanding of the organization’s goals. Together, you can begin to create a strategy to optimize assets and opportunities, both today and in the future.
Deborah Brown is senior vice president and Great Lakes regional sales director at Key Equipment Finance.
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