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Equipment finance: a strategic advantage for your business?

April 2, 2015

Having best-in-class equipment and technology can drive competitive advantage, but with capital budgets declining, executives are finding it increasingly difficult to access the tools they need to out-smart the competition and grow their business.    Robert Spano, Chief Executive Officer at Alleasing, takes a look at an alternative approach to funding those equipment needs.

Our reliance on equipment and technology is ever-increasing, but the challenge often faced by executives is having a sufficient capex budget to purchase all of the assets that could benefit the business. However, I often suggest to clients and colleagues that by re-thinking their capital acquisition strategy, they may be able to achieve more than they thought was possible.

Getting the right outcome for your business simply depends on working through a few critical steps:

Categorise your equipment wish list

Start by dividing your equipment wish list into two groups:

  • those items that are likely to increase in value (group A); and
  • those items that are not likely to increase in value (group B).

Once you’ve done this, earmark the items in group A as those you want to spend your capital budget on and those in group B as the items that require an alternate funding source.

Note that I’m not telling you to cross group B items off your list. Rather, I’m simply seeking a different way to enable access to them.

Think about how you will use the equipment

Before you can consider an alternate funding source for group B, you need to think about how you intend to use the equipment.

Consider for example, the following questions:

  • How long will you require the equipment?
  • Is it to be used for a one-off project or will it form an integral part of the day-to-day running of your operation?
  • What is its useful life?

If you determine that the assets have a short-to-medium life, then leasing or rental may be the right approach to accessing the equipment you need. Also, if you need the equipment for a one-off project, rental is often a good option as it allows you to pay for the use of equipment for a specified period.

Find the right partner for your business

The right partner can add significant value to your operation and they can help you to work through all of the steps outlined below.

The right partner is one that understands the market in which you operate and also has a good grasp of the equipment you need. Yet, while they need to appreciate the equipment, it’s preferable they are vendor independent – this means you can utilise whatever brand of equipment your business wants.

If your intended partner doesn’t match this description, I’d suggest you go back out to market because the wrong partner is going to create long-term headaches for your business.

Carry out a cost / benefit analysis

The next step is to run through a cost / benefit analysis. Simply compare the expected costs to lease or rent the equipment with the revenue you expect to generate as a result of using the equipment.

This will tell you whether leasing or rental is a good finance option for your business.

Determine the total cost of the finance arrangement 

If the cost / benefit analysis stacks up, you should ensure you are clear on the total cost of the finance agreement. This includes the number of payments you will owe, the regularity of those payments and the value of each.

Clarify the terms of the contract

While you are in the process of ensuring there are no misunderstandings around cost, you should also cover the terms of the contract.

Two of the primary reasons why companies utilise equipment finance is that it enables bundling of costs such as installation and maintenance and, it offers flexibility to move in and out of equipment as needed. But, it’s important you are clear up-front whether these features are included in your agreement.

Ask your intended partner questions like:

  • Can I bundle the installation and maintenance fees into the agreement so I can spread the costs over the life of the equipment?
  • Are any other services included in my agreement? For example, do you have asset tracking systems that we can use?
  • Can I upgrade equipment before the end of the lease and if so, what obligations do I need to adhere to?
  • What options do I have at the end of the agreement and what obligations do I need to adhere to regarding notification and return?

Make the switch

Once you’ve worked your way through the necessary due diligence it’s time to make the switch.

We are all operating in an increasingly competitive business landscape, so any move we can make to out-smart our competitors, improve productivity, better satisfy our customers’ needs or grow our business can only be considered a step in the right direction.

While it may take a shift in mind-set to split your equipment needs into these two distinct groups (those that increase in value and those that don’t), I’m sure you will see the advantage when more of your equipment needs are able to be met.

 

 

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