Most business owners understand the importance of insuring their physical property.
But too many are unaware of the need for insurance to cover losses resulting from that physical damage, such as lost revenue when mechanical equipment fails, says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group.
“In a business, people will buy property insurance to cover the building, its contents and those types of things and assume they are covered, but that coverage does not includes equipment breakdowns, electrical arcing and other things that can happen to the machines that run the business,” says McTeague. “And if a critical piece of equipment goes down and you are not covered for those losses, you could be out of business.”
Smart Business spoke with McTeague about how to ensure that your business survives an equipment failure.
What is equipment breakdown insurance?
The five main items that are covered under equipment breakdown insurance are electrical; equipment, air and refrigeration; equipment, boiler and pressure vessels; computers and communication equipment; and mechanical.
Where should a business owner begin when considering this insurance?
First, find an agent who is knowledgeable about this insurance and doesn’t just throw it in as an afterthought. It’s complicated, and, too often, it is overlooked, or not written properly, because agents aren’t comfortable with it. Business owners should rely on an expert to design the program.
Once you’ve identified that person, he or she will look at the overall property profile and, based on the building and content limits, look at what kind of machinery the business relies on. Is there production machinery? Are the machines redundant? What kind of protections do they have? What kind of maintenance programs? Have you done thermal imaging studies? What are you doing to prevent a loss in the first place? Does the business have a pressure vessel — a boiler?
Everyone understands the risk of a boiler exploding, but they don’t understand that a business could have electrical arcing that could take down a call center, resulting in the loss of thousands of dollars in repair costs and lost sales. The physical damage to that equipment may be covered under property insurance, but unless you have equipment breakdown insurance, costs such as lost business income and revenue and lost production time would not be covered.
People often think if equipment breaks down it’s uncovered because it is a wear and tear issue. But while wear and tear is not a covered peril, a sudden, accidental breakdown is. And there can be really large dollar amounts involved here.
What kinds of businesses should consider equipment breakdown insurance?
Every business runs on some type of electrical apparatus, such as a computer, so every business could benefit from this coverage.
A lot of times we see property owners who don’t have coverage because they are leasing the space out. But if an electrical arc blows out the air conditioning or heating of an office building and you don’t have coverage for temporary power and to expedite the repair process, you will have angry tenants not paying the rent.
This coverage is becoming more prevalent, but we estimate that half of the companies that need it still don’t have it, or they have base form coverage that might not cover things such as lost revenue or contingent business income. Take, for example, a manufacturer that relies on another company to make half its product and uses that product to put together its own product. If that supplier has an equipment breakdown, it could break down the whole chain, and the manufacturer is no longer able to produce its product. However, there is a way to write the insurance that covers that contingency.
What would you say to business owners who say they can’t afford this type of insurance?
A business is more likely to have this type of loss than a fire, and no business would go without fire insurance. A knowledgeable agent can change deductibles and move coverages around and make it affordable. This is not an exceedingly expensive coverage, but a resulting incident could be.
If you think about a rooftop unit on a mall that is cooling the entire place, the compressor alone can cost $20,000 to $30,000. Just to repair the physical damage can be brutal, but then there is the service interruption, lost revenue and lost rent.
Another example is medical centers that either don’t have coverage or don’t have it written properly. If there is a sudden power spike that blows an MRI machine; MRIs still have to be done, only now they’re going to be done somewhere else. And without insurance, you lose the ability to get that revenue back. If it takes three months to get parts from overseas and get it rebuilt, you could be out of business. But if your policy is designed correctly, those resultant losses will be covered.
The lost income and expedited expenses of getting the equipment repaired quickly can be costly. And the extra expense of sending your customers elsewhere to get the job done is something you have to do to keep your clients happy in the interim, because if you don’t, they’ll go somewhere else permanently.
Having equipment breakdown insurance can help ensure you cover those losses to get back into business as quickly as possible.
Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or email@example.com.
Chalk it up to simple economic realities, but a capital expenditure requires quite a bit of forethought these days. This makes finding the best equipment financing for your business more important than ever, says Tim Evans, president of FirstMerit Equipment Finance.
“We tend to keep equipment around a lot longer than we have in the past,” Evans says. “It’s important that when you get that initial piece of equipment and you make your decision on financing that you are thinking long term, not just short term, and that you understand the value of that equipment to your business.”
Smart Business spoke with Evans about how to set up the best equipment finance agreement for your business, and what not to do when structuring the agreement.
What are some issues companies should consider when financing equipment?
Companies should think through the true economic life of the equipment. How long will you be able to use it in its current application? Can it be converted to some other capacity to lengthen the life of the equipment longer than it would normally be? Are there upgrades or refurbishments that could extend the life of the equipment?
How can companies determine whether financing or purchasing a piece of equipment is the right choice?
You can’t be short-sighted in how you use your capital today. We’re coming out of a recession, and many customers are asking for sale leasebacks because, prior to the economic slowdown, they tied up their capital in their equipment purchases. When you run into a down cycle like we’re in today, you need working capital to run your business. But when you’ve tied it up in your equipment, you’re out of luck.
Equipment financing and leasing is the way to go to avoid a shortage in working capital. If you have the ability to finance your equipment and keep working capital in your business, that gives you more flexibility. It’s very difficult to structure a sale leaseback 12 to 18 months after you paid cash for the equipment, because the equipment depreciates and its value will be a lot less at that point in time.
What should business owners look for when setting up financing agreements for leased or purchased equipment?
One of the biggest misnomers in the industry is to look for the absolute lowest rate for your equipment financing. Money is money, but when you are looking for equipment financing, you want to work with a partner who understands your business, and who understands the necessity of being able to do something different down the road if your situation changes. You need flexibility.
Often, companies get offered a below-market rate that looks great at the time they signed the deal. But what if they are two years into their five-year deal and they need to make a modification? When you go into that low of a rate structure, many times the flexibility just isn’t there because of the tight requirements in order to achieve the goals that the lessor established in the deal.
At FirstMerit, we look at it as an overall relationship. Our goal is to give you the ability to work within your business frame to make any necessary changes in how you are doing business if your situation changes.
You should look to work with a lessor that is flexible. If you just go with whoever is offering the lowest rate on the street, you’ll find that service and price don’t always go hand in hand. We will always be competitive, but we also pride ourselves on being a good service partner.
What are some typical equipment financing mistakes that companies make, and how can they be avoided?
The biggest mistake companies make is they aim for the lowest possible payment. Typically, that means you get the longest possible term, which can create a lot of issues down the road.
You might have an asset that won’t be of any use to you after five years. But you have a targeted payment in mind, and because of that you need an seven-year term. The structure of the lease, the potential buyout on the back end of the lease, whether it is a fair market value lease or a conditional sale — those are all issues you want to be aware of, because they are going to impact what happens down the road when you decide whether you want to buy that equipment or return it.
Another key point: make sure you understand the tax ramifications of your transaction. It may be beneficial to your company to pass any bonus depreciation on to the lessor (the bank) and do a true lease, because you could receive a lower payment structure. In this case, the lessor would take the depreciation benefits and then pass those benefits back to you in the form of a lower rate.
Always ask questions and make sure you read your documentation — especially the fine print. You don’t want any surprises down the road so make sure you read your documents thoroughly.
How can business owners determine whether an equipment lease being offered by their bank is a good one for their business?
There are three major components to consider. First, how long are you keeping the equipment? Can you utilize the tax benefits? If cash flow is an issue, is 100 percent financing more attractive than a conventional term loan where a 20 percent down payment may be required?
Tim Evans is president of FirstMerit Equipment Finance. Reach him at (330) 384-7429 or Tim.Evans@firstmerit.com.