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Don’t get caught with obsolete equipment

February 20, 2015

Equipment is critical to every business, but effectively managing refresh cycles as technologies continue to evolve can be a headache. Robert Spano, Chief Executive Officer at Alleasing, examines how businesses can utilise their asset finance solution to avoid getting caught with obsolete equipment.

Whether you work in the services industry and require IT assets for your staff, or you run a manufacturing firm and need production-style machinery to keep your business operating at capacity, equipment is critical to your success.

Surprisingly however, when I’m out and about talking to business managers and owners, they often ask me how I can help them to overcome their equipment challenges. Generally, these challenges relate to one of two scenarios: they have held on to equipment that has passed its useful life because disposal was an issue or, they have held on to equipment that’s passed its useful life because they had capital budget constraints.

Both of these scenarios cause major headaches for businesses because they create a significant productivity drag and can also lead to unhappy staff. Positively however, they are issues that can be addressed by finding the right equipment finance partner.

Of course, I would say that given my line of work…let me explain how and you can decide for yourself.

It begins with structuring the right finance solution. If regular upgrades of equipment are important, this means you need an operating lease or rental structure. In other words, you need a finance solution that allows you to give the equipment back at the end of the term, thus making equipment disposal someone else’s issue.

The next step is to ensure you establish the right terms for your operation. This stage is heavily dependent on the type of equipment you need so be sure to consider the following:

  • what is the expected life of the equipment?
  • how long do you want to keep the equipment in service?
  • what is the equipment being used for – is it a one off project or do you need it on an ongoing basis?

By working through these issues with your equipment finance partner, they will be able to structure the finance to best suit your requirements.

Two useful examples that help to bring this to life are a hospital and a university. A hospital generally needs longer-dated assets such as MRI machines, while a university is dependent on shorter-dated, IT equipment. As such, the way a lease or rental is structured for a hospital should differ to the way it is structured for a university. At the very minimum, this means the hospital should take out a longer lease term than the university and if you spread the finance over a longer period, your regular payments will be reduced.

The commonality between the two is that both generally establish refresh cycles at the outset of an agreement. That is, they set up their lease or rental to match the expected life of the equipment and use the end-date on the agreement as the catalyst to upgrade.

Given the specialised nature of hospital equipment, it can be the case that the delivery of the new machine does not align exactly with the intended refresh date. Often, equipment is sourced from overseas and it may require modifications to meet certain specialist requirements. However, with the right lease or rental agreement this isn’t an issue – the user has the flexibility to keep the equipment for a little longer so they aren’t left in the lurch.

Many of our clients in these industries, and others, have utilised equipment finance for a number of years because it allows them to address a range of business drivers:

  • it prevents technological obsolescence and ensures they have best-in-class technology, which attracts the quality staff that is critical to their success;
  • it supports business planning by providing clear visibility over refresh horizons and budget requirements;
  • it overcomes financial constraints by tapping into the operating budget rather than the capex budget; and
  • it provides flexibility to extend the agreement if needed.

I’m sure no-one will disagree that getting caught with obsolete equipment is a headache we could all do without. Whether or not a lease or rental solution can solve this challenge for your business, only you can decide.

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