As originally published through The Business Journals.
Companies across the U.S. are dealing with an increasing list of pain points as the pandemic approaches the three-year mark. Historic inflation, rising wages, talent shortages and persistent supply chain problems are some of the top issues that are keeping corporate leaders up at night.
One silver lining of the pandemic is that it reinforced why “cash is king” during times of economic uncertainty. Companies with strong balance sheets were able to continue to pay employees and suppliers and, some didn’t just survive, they thrived. In fact, as Deloitte reports, “CFOs in companies with a strong balance sheet and cash reserves are likely positioned to seize opportunities to innovate, outdistance their competitors and grow more quickly in the ensuing recovery.”
For companies in the transportation, leasing and rental, aviation, construction and mining, manufacturing, utilities, information technology, medical and marine industries, replacing outdated equipment is a necessary part of doing business. As they consider how to pay for these capital-intensive purchases, protecting cash flow in the face of trying times will prompt them to consider financing options that have a minimal impact on the balance sheet.
At First Horizon Bank, we are helping our clients reach their equipment purchasing goals. Here’s a look at the benefits of equipment financing and our approach to serving clients with these needs.
The benefits of equipment finance
Equipment financing allows a company to structure equipment purchasing for a fixed rate, for a fixed set of time, without having to dip into cash or working capital. That means cash can be used for other areas of corporate growth, such as expansion, acquisitions, improvements, technology upgrades, marketing, and research and development.
Despite the current economic headwinds, the Equipment Leasing & Finance Foundation forecasts equipment and software investment growth of 5.9% in 2023. While growth may have bottomed out in some industries, equipment spending is expected to continue for materials handling, industrial, medical, aircraft ships and boats, railroad, trucks and computers.
According to the Equipment Leasing and Finance Association (ELFA), some of the main benefits of equipment financing include:
Get 100% financing with no down payment: Unlike requirements of most traditional lenders, you may be able to arrange 100% financing of equipment with no down payment. This is key if cash flow is a concern to your business.
Manage risk: Equipment financing can help mitigate the uncertainty of investing in a capital asset your business needs until it achieves a desired return, increases efficiency, saves costs or meets other business objectives.
Hedge against inflation: Equipment financing may hedge inflation risk because instead of paying the total cost of equipment up front or with a large down payment in today's dollars, the stream of payments delays your outlay of funds. In addition, either a lease or loan can lock in the rates that exist on the date of the closing. In other words, the finance company absorbs the devaluation of your payments over time due to inflation and other financial risks.
Plan expenses for cash flow and business cycle fluctuations: Financing equipment helps maintain cash flow and greater certainty in budgeting by setting customized rent payments to match cash flow and even seasonal cash flows.
Keep up to date with new technology: Leasing, loans or other financing often enable you to acquire more and better equipment than you could have without financing. Certain leasing finance programs can also allow for technology upgrades and/or replacements within the term of the lease contract.
Address tax considerations: Tax-oriented leases should produce lower rents since the lessor retains title and depreciation. A tax-oriented lease is a transaction that includes the value of tax benefits. Conversely a conditional sale or loan enhances tax benefits of higher deductions to the lessee/borrower.
Leverage equipment expertise: The equipment financier can be a valued consultant, providing benefits that range from setting residual rates through lifecycle asset management solutions.
Avoid getting stuck with out-of-date equipment: When a lessor owns the equipment in a true lease, the lessor bears the risk of the equipment used by a business becoming obsolete.
Outsource asset management: Many financing companies provide asset management services that can track the status of equipment, know when to upgrade or update it, and provide services relating to installation, use, maintenance, de-installation and disposal of the equipment.
Obtain the convenience of product and service bundling: Certain financial products allow customers to finance the entire cost of equipment, including installation, up-front maintenance, training and software charges, thereby packaging systems and ancillary products and services into a single, easy-to-manage solution.
Get no-hassle equipment disposal: Equipment management by a third party, such as an equipment financing company, should enhance the ability of a business to focus on its core operations. In the case of computers and other technology devices, these companies may also agree to dispose of equipment. This service can prevent the lessee or borrower from incurring legal penalties for improperly disposing of such assets because disposal is often regulated by federal, state and local governments.
First Horizon’s approach
At First Horizon, when it’s time for our clients to make a new purchase, we don’t want them to be slowed down by a long, inefficient process. Our experts provide timely solutions that keep these companies running. Available to them are both equipment loans and tax-advantaged leasing products tailored to minimize upfront investment and to optimize cash flow. Some of the core principles of our equipment financing group are:
Streamlined decisions: We’re aligned with commercial and specialty banking teams and can deliver what clients need, when they need it.
Personalized attention: Clients have direct access to key decision makers and leaders at the local level.
Decades of experience: Our bankers know the market, have deep industry knowledge and can handle the needs of both large and small businesses.
ELFA believes inflationary pressures that drive equipment prices higher will make financing more desirable with payments spread out over time. That’s one of the reasons why we at First Horizon believe – even as economic challenges persist – that equipment finance will continue to play an important role in how companies across the U.S. execute their growth plans.
