The global recession has impacted businesses of all sizes, forcing executives to make quick adjustments to their organizations, including minimizing or freezing spending and investments.
However, the pressure to stay competitive in the global marketplace makes it unrealistic to hold off on technology and operations improvements for the long term, says George Fantom, a vice president with PNC Equipment Finance.
“With emerging trends indicating an improved economic environment for 2010, more businesses are re-evaluating their plans and budgets to determine what initial investments make the most strategic sense,” Fantom says.
And as conditions improve and credit starts to flow again, it’s likely that many companies will consider investing in capital expenditures.
Currently, more than 90 percent of U.S. businesses take advantage of financing solutions offered by equipment finance companies, which can include options from 100 percent financing to customized balance sheet treatment to other creative solutions.
Smart Business spoke with Fantom about solutions to keep in mind as you approach your 2010 capital budget planning process.
When financing capital expenditures, what are the options for a traditional loan structure?
In an environment where interest rates are still near historic lows, some equipment acquisitions are best supported by traditional loan structures. But what many executives may not realize is that a loan can be structured as more than just interest, term and principal.
Other options can include:
- Structuring a balloon payment at the end of the term loan can add cash flow benefits and provide a hedge against gains and losses on a sale in a volatile used equipment market.
- An interest-only component at term inception can allow the new piece of equipment to ramp up in performance and allow you to ramp up your cash outlays.
- Qualifying for 100 percent financing of your equipment acquisition can allow you to gain financing without concern for a loan-to-value calculation and a cash down payment.
A creative loan can help control infrastructure costs, better leverage working capital, preserve cash flow and effectively manage equipment obsolescence.
What should businesses consider when thinking about the leasing option?
You should consider timing as well as how the asset you are acquiring will be used. Is it a laptop sitting on a person’s desk for three years or a machine tool that might be bolted to the floor for 20 years? What options do you have once this equipment becomes obsolete?
When examining the true life cycle of an asset, leasing may often fit your needs better than a loan.
How does leasing positively impact cash flow?
Cash flow may be the most important component of your business and the second and third most. Leasing, among other equipment finance strategies, can present the greatest cash flow benefit because of the residual position the lender takes.
In addition, by passing a tax depreciation benefit you may not be enjoying, you can further positively impact your monthly obligations.
What are the tax benefits to be gained from leasing?
Ownership provides solid depreciation benefits, but are you getting the most out of them? Would the expense deduction of rental payments combined with the cash flow savings exceed perceived gains from depreciation?
You should consult your team of financial experts to gain a full understanding of the recent economic stimulus legislation and government incentives for capital investment.
How does leasing help improve the liquidity of a business?
Leasing provides a capital-raising alternative because your equipment finance provider puts its money into the depreciating assets, while your cash flow can be used for other areas and activities that may generate a stronger return on investment.
This pay-for-what-you-use approach may allow you to pull more out of your budget than you thought possible.
By considering these equipment financing solutions for your 2010 capital expenditure budget, as well as for your existing asset base, you have the opportunity to make a positive impact on your business cash flow and liquidity. It’s important to remember that even in the current market, there are still equipment financing solutions available for your business, and times like these need more than just the same old thinking.
Equipment financing and leasing products are provided by PNC Equipment Finance LLC and PNCEF LLC, which are wholly owned subsidiaries of PNC Bank, National Association, a subsidiary of The PNC Financial Services Group Inc.
George Fantom is a vice president with PNC Equipment Finance, a leader in offering comprehensive equipment finance solutions to customers throughout the U.S. and Canada. Reach him at (610) 725-5769.