Bank leaders discuss the 5 biggest advantages of equipment financing.
Adding equipment is a critical component of the growth strategy for many businesses. But the cost often presents a significant challenge.
For nearly eight in 10 businesses, the solution is to finance at least some of the cost. In 2021, companies financed an estimated $1.16 trillion worth of equipment and software. The Equipment Leasing & Finance Foundation, which tracks the data, says the top three types of equipment that businesses finance or lease are transportation, IT and related technology services, and construction.
At Commerce Bank, we are honored to serve our clients in these industries. “We provide financing options for a wide range of assets such as transportation, construction, manufacturing and agricultural to name a few,” according to Jody Green, president of CBI Equipment Finance, Inc., a subsidiary of Commerce Bank. “We also have specialists that focus specifically on corporate aviation, healthcare, marine, and municipal or tax-exempt financing where the assets, structures and documentation can become more complex.“
Green said there are five key advantages of financing equipment.
Advantage No. 1: Preserve cash flow
Financing equipment preserves cash flow for use elsewhere in the business. Today, financial institutions offer several financing structures, which make adding equipment more flexible.
“Equipment is expensive,” said Rob Fischer, senior manager of CBI Equipment Finance with Commerce Bank. “It doesn’t make sense to spend all that money upfront when you could use that cash to buy inventory, pay salaries, expand your staff, put a new roof on your building, or whatever you need to do. With equipment financing, you can save that cash and create a monthly finance payment that is manageable and fixed, preserving cash you might need for a rainy day.”
Advantage No. 2: Conserve bank lines of credit
Similar to protecting cash flow, businesses that use equipment financing are tapping into a different financial product than their usual credit facility. That leaves their line of credit available for buying inventory or handling accounts payable.
“Rather than use a line of credit, the better way to structure an equipment transaction is to look at the life of the asset and put it on a fixed rate or even a floating rate with a fixed-term transaction specific to that asset,” Green said. “That keeps the capital line available in case you need to deal with a rise in inflationary costs of inventory or larger payables due to a cyclical pattern in your business.”
Advantage No. 3: Be nimble
For some companies, landing a new contract may hinge on acquiring a major piece of equipment. Yet, if the equipment will outlive the length of the contract, the business may later find itself with unproductive overhead costs. Equipment financing helps businesses jump at new opportunities with less long-term risk.
“Take a construction company with an opportunity to sign a three-year contract that will require a new piece of heavy equipment,” Green said. Buying the equipment will provide a return, but only while the equipment is in use.
“In this scenario, they can finance it over that period of time through a lease structure,” he said. “That gives them the ability at the end to decide whether or not they want to own the equipment.”
Advantage No. 4: Stay up to date on technology
Technology moves quickly. Installing new equipment often brings about substantial performance improvements. It may allow employees to complete tasks faster, reduce errors, or create a more positive customer experience. It also allows businesses to stay on top of emerging technology by replacing equipment more frequently.
“If you’re a manufacturer and you want to keep up with your competitors, you need to keep up with the technology,” Fischer said. “Having newer equipment and technology can ease customers’ minds and may attract new customers because of increased speed or capabilities.”
Advantage No. 5: Maximize tax benefits
The government offers significant tax incentives to businesses that invest in new equipment. Equipment financing gives CFOs multiple options to ensure they take advantage of those incentives.
For example, with traditional equipment loans or finance leases, companies can claim the depreciation and interest deductions on the equipment just as they would if they paid cash. However, some companies don’t have the net income to realize the full amount of available depreciation. In this case, an operating lease offers another path to realize those tax benefits. Consult a tax advisor for further guidance.
These advantages create great flexibility for any business facing significant equipment costs, making equipment financing an important tool for business growth.
Learn about equipment financing at Commerce Bank and the options available to you.
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