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Construction Equipment Financing | 7 Park Avenue Financial
The Role of Construction Equipment Financing in Canada
Construction Manufacturing Equipment Financing plays a considerable role in the Canadian economy. Business owners and financial managers such as you want to ensure they have the best leasing and financing options available to them – It has been proven that financing equipment via leasing is very cost-effective.
Benefits of Matching Lease Terms with Equipment Use
One of the many essential features of such financing is the ability to match the lease term with your expected use and the residual value of the equipment. Generally, lease financing for used and new manufacturing equipment can be arranged for terms varying from 3 to 5 years.
Understanding the Economic Life of Assets
No one knows better than the business owner what the useful expected equipment life of the asset will be, and we encourage clients to match the lease financing transaction term with the asset's economic life. The reality is of course, that trucks/rolling stock and construction manufacturing assets / heavy duty equipment have significantly longer useful expected values – (as compared to assets such as technology and computers!)
The Importance of Consulting a Lease Financing Advisor
We encourage clients to work with a trusted, credible, experienced lease financing advisor. The benefit of such knowledge can save you many thousands of dollars based on the overall rate, term and structure of your lease transaction.
Comparing Financing Options: Leasing vs. Loans
There are other financing options when it comes to acquiring such assets – those options could include a government small business loan or a term loan from banks. While these might have a lower rate to the overall transaction, they come with much more stringent credit criteria – heavy emphasis is placed on your firm's balance sheet and income statement. Leasing, in general, places a larger emphasis on the expected value of the asset during the term and at the end of the lease.
Financing Additional Costs and Leveraging Existing Assets
Many customers don’t realize that some of the additional costs related to the acquisition of used and/or new construction manufacturing equipment can also be financed via leasing companies – these include maintenance, installation, shipment, etc. That’s a massive cash flow and working capital benefit.
Sale Leasebacks
In some instances, your firm might already own such assets, and you might want to consider leveraging them through a sale-leaseback for additional cash flow and working capital. That is an excellent financing strategy that many firms have taken advantage of over the last year, as cash flow and working capital availability tightened significantly during the global credit crisis of 2008 and 2009 during the COVID-19 pandemic of 2019. Owners adopted a strategy of leveraging their asset equity to stay liquid and competitive.
Lease Financing as a Cash Flow Strategy
Many financial managers view lease financing of such assets as a solid cash flow strategy; you minimize payments and match them to the overall benefits of the equipment you are acquiring.
Conclusion: The Importance of Strategic Lease Financing Planning
Both loans and leases offer distinct advantages and financial flexibility when it comes to financing equipment.
With loans, you're actively building equity with each payment, and by the end of the repayment period, you own the equipment outright. This mode of financing also allows for the depreciation of the asset for tax purposes, and the equipment stands as an asset on your balance sheet, enhancing the financial standing of your business. Generally speaking, a high credit score is required for bank loans and term loans for financing assets.
Another advantage is that there are no constraints on how much you can use the equipment in terms of hours and wear. Essentially, installment payments mean you're not just paying for usage, but also accumulating ownership.
On the other hand, leasing is particularly beneficial for businesses looking to reduce initial costs. Typically, lease payments under a lease contract are lower than loan installments, making it a cost-effective short-term option.
Instead of tying up equity in machinery, businesses can allocate their funds to other operational areas. The essence of leasing is that you're paying for the use of the equipment, and once the lease term concludes, you have the flexibility to either return the equipment or buy it. This flexibility extends to replacing machinery, as you can easily return and upgrade to newer models at the end of a lease, ensuring your business always has access to the latest equipment without the hassles of ownership.
Heavy Machinery Financing And Leasing - Loans Canada
Call 7 Park Avenue Financial, a trusted credible and experienced business financing advisor. Focus on which benefits of lease financing are most important to your firm. Structure and acquisition that makes sense from a cash flow, rate, and term structure based on the asset's value and your current financial condition. That is solid business planning for growth.
FAQ:
What is construction equipment financing?
Construction equipment financing refers to the various financial products and services that allow businesses to acquire construction machinery and equipment loan options for their job site without paying the full amount upfront. Instead, they can lease or finance the equipment, paying for it over a set period, often with interest. Often 100% financing is available on most equipment and heavy machinery, so no large down payment is required for the right equipment selected by the borrower.
How does leasing construction equipment differ from purchasing it outright?
Leasing construction equipment allows businesses to use the machinery for a specified period without owning it. At the end of the lease term, they can choose to return the equipment, purchase it, or renew the lease. Purchasing equipment outright means the business owns the asset immediately, bearing all the ownership responsibilities. Leasing for construction companies can offer more flexibility and might be more cost-effective in the short term, especially for equipment that quickly depreciates or becomes obsolete via tailored loan payments/lease payments.
What factors should businesses consider when leasing and buying construction equipment?
Businesses should consider several factors, including the equipment's expected lifespan and technological relevance, their current cash flow, the tax implications of leasing versus buying, the total cost of ownership (including maintenance and potential resale value), and their long-term equipment needs. Additionally, the flexibility of updating equipment and the potential impact on their balance sheet might influence the decision.
Are there any additional costs besides the equipment's price in construction equipment financing?
Yes, depending on the financing or leasing agreement terms, there can be additional costs in heavy equipment leasing - Along with interest rates on financed amounts, service and maintenance fees, insurance costs, and potential penalties for early lease termination or missed payments. Some agreements might also include provisions for additional expenses related to equipment delivery, installation, and training.
Can businesses finance used construction equipment, or is it limited to new equipment?
Businesses can typically finance both new and used construction equipment via a heavy equipment loan or lease in the construction and manufacturing industries. Private sales are not allowed, so financing is limited to dealers . The terms, interest rates, and duration might vary based on the age and condition of the used equipment. Financing used equipment can be a cost-effective solution for businesses that do not require the latest models or for those looking to maximize their budget. However, ensuring that any used equipment is in good working condition and meets the business's needs is essential to borrow money for used equipment.
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