Staying competitive requires state-of-the-art equipment, but should you buy or lease?

Lease agreementEquipment is the backbone of businesses across all manufacturing industries. Obtaining the equipment necessary to make your business profitable and productive is time consuming and expensive. You want the right equipment for the job and you also need to consider whether you should purchase or finance it.

LeaseQ is a marketplace for equipment financing, using a platform the company developed and customized for equipment sellers. This also helps manufacturers, particularly those in the packaging industry, find the best financing options for their equipment needs. “Purchasing equipment out of pocket is expensive,” said Vernon Tirey, CEO of LeaseQ. “The significant upfront cost of a filling, bagging, wrapping or labeling system can have a severe, negative effect on cash flow, particularly for food packaging companies in early growth stages or those looking to expand. Equipment financing allows these businesses to preserve cash for strategic investment or a rainy day, while securing the latest and greatest equipment they need to get the job done efficiently.”

Tirey pointed out to PlasticsToday that in the 1990s it was more difficult to finance machinery. “In the commercial equipment world, financing equipment was very painful,” he said. “There were a lot of hoops to jump through and there was no automated underwriting in place. We’ve created the technology and infrastructure to allow the seller to make it easy and cost-effective to finance that equipment for a wide range of buyers, including all credit classes from A+ to D and even startup companies.”

LeaseQ provides a technical platform that matches buyers, equipment sellers and lenders. A marketplace typically matches buyers and sellers, but LeaseQ takes the process from the typical two-party transaction to a three-party transaction.

There are three fundamental problems in the equipment financing world, said Tirey. The first is the lengthy and painful process of shopping for competitive equipment financing, which includes loans and leases. “We make it easy and fast for someone needing equipment financing to submit one application and see the best options for loans and leases,” he explained. “We provide instant quotes for monthly payments with terms from 24 to 60 months. The borrower sees who the lender is and compares information. Best of all you don’t have to talk to a sales rep, and it’s all available at no cost.”

Second, if you’re selling packaging equipment or injection molding machines, you have a variety of customers from startups to large purchasers, those with good credit and those with less credit worthiness. “No single lender will handle all dollar amounts or all types of equipment and all levels of credit worthiness,” said Tirey. “There are different types of equipment in different types of industries, and lenders need help in servicing these various requirements. We take that problem away from the equipment seller and put together a team of lenders that meet the sellers’ unique needs.”

The third problem is removing the difficulty involved in financing and making it as easy as financing a car. “We’re trying to automate the process of equipment financing by working with lenders to help them automate the process at the front end so that the back end is more efficient and cost effective. Equipment financing is getting easier and faster everyday but we still have a lot of work to do.”

Equipment financing pretty much works the same across any industry, Tirey explained. “Loans and leases are still available—the structure is available—but the financing rates can vary depending on a variety of factors. First, the type of equipment really matters when it comes to financing. Lenders like to know why you need the equipment; if the equipment is core and critical to the business, the lower the risk to the lender. The useful life of the equipment is also important. After five years of financing, if the equipment holds good value, that significantly lowers the risk for an equipment financing company. The value of used equipment in the secondary market can also have a huge impact on the ability to keep financing rates low for borrowers.”  

Captive financing—when an equipment manufacturer provides financing for its own equipment—is still available. Financing is a tremendous tool for selling more effectively. “Equipment manufacturers can grease the wheels of the sale with in-house financing or what we call ‘white labeled’ financing backed by a commercial bank so that precious capital is not tied up,” Tirey said.

“A lot of people I talk to just assume that every manufacturer has in-house financing options but the reality is that it is only available for their biggest and best customers. It’s not as available as you might think,” Tirey added. “We put captive financing on our platform. If an equipment seller wants to provide financing options, one of those can be captive financing, with the idea that they can provide financing to their good credit customers and the rest can go elsewhere. But most often equipment sellers have us add a team of lenders to support all their customers.”

The downside to in-house financing is that it takes a lot of capital to act as a financing company. “For industrial equipment manufacturers, it’s better not to tie up cash doing financing when it can be used for R&D or for opening new markets,” said Tirey. “We do ‘white label’ financing. We’ll put it in place and shop for lenders, and put a white label on it.”

Equipment financing is probably the first financing anyone should put into place. “The equipment generates revenue, which should be able to service the debt and still produce positive cash flow. It makes good sense to finance your equipment and save your cash for day-to-day business operations. The equipment will pay for itself over time. Oftentimes the installation and servicing can be included in the financing, as well,” said Tirey. “For example, you buy a $100,000 piece of equipment, put it on the plant floor and you’re making money with it and servicing your debt, while growing your business and keeping your cash in the bank for other purposes.”

Tirey offers another piece of advice: Though most companies financing equipment think most about finding the lowest monthly payments, if the equipment you need will be obsolete in three to five years, consider a lease rather than a loan. “You can keep costs low and return the equipment at the end of the finance period to more easily keep up with technology advances and always have the best equipment available by upgrading. Again, it depends on why you’re buying the equipment. If you’re going to use the equipment for 20 years, with a loan or a $1-out lease, you can use it free for the last 15 years.”

A lot of factors go into the decision of acquiring equipment: Your business objectives, your long-term plans and strategies. “As you’re walking your manufacturing floor you might want to look at how you can stagger equipment acquisition so that you have the latest technology and the most efficient plant, so you can manage your investment and capital,” Tirey advised. “You don’t want to take it all out and put in new equipment every five to 10 years, but rather reconfigure lines as the marketplace demands, using financing to manage your capital expenditures and cash.”

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