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Building growth in difficult times

Equipment acquisition during economic uncertainty

Updated, efficient equipment supports a company’s growth and competitive edge. However, acquiring equipment often challenges mid-sized businesses. This experience outlines factors to consider relative to your assets during a worldwide pandemic and economic uncertainty. It also highlights tax changes that could impact your organization.

A critical time to compare your options

Business growth and stability pose a dilemma – especially in the midst of volatile markets and escalating concerns about capital. There’s no question that leading-edge technology, timing, and scalability play key roles in an organization’s assets. However, the ways in which you choose to pay for new equipment may vary according to your business objectives. More than ever before, the benefits of financing could have a significant, positive impact on your goals and success.

Immediate access to
a strategic tool

The power of
liquidity management

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Immediate access to a strategic tool

Especially in times of constrained capital resources, it’s essential to note that equipment financing is available right now, with no or low advance payment required. Further, financing offers unmatched flexibility. Through customized structures and a variety of payment plans and terms, financing can be a powerful business tool to support growth in current market conditions and beyond. Let’s take a closer look at these features and other points to consider about equipment financing.

Retain business capital and stay nimble

Foremost, strategic equipment financing can help to retain your organization’s agility – without depleting its cash, capital reserves, or third-party lines of credit. Payment plans allow you to acquire the assets you need now and generate revenue while you pay for them over time. 

Unparalleled flexibility

Customized structures can be tailored to accommodate your current budget requirements and longer-term goals. For example, you can match your payments to seasonal revenue cycles, anticipated growth, or unexpected pivot goals. Leasing also allows you to bundle equipment and related expenses like software, delivery and training into a single payment plan, which can increase efficiency and improve forecasting.

Enhanced cash flow

By preserving cash and taking advantage of historically low interest rates, companies are able to use equipment financing to support financial stability and business continuity. In a tough economy, it’s important to keep sufficient cash on hand for unforeseen expenses and liabilities—or adapt to changing market conditions as illustrated in the following example.

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The power of liquidity management

A lease can leave capital reserves intact – free to use for other investments and improvements, or to help you pivot quickly when unexpected events impact your business or the broader economy.

Large capital outlays for equipment can present financial risk for businesses to evaluate and manage. Equipment financing can help a business manage the uncertainty of investing in equipment that contributes to achieving business goals, and adjust cash spending for other imperative needs. Using fictitious figures, the following sample scenario illustrates how financing equipment can enhance cash flow, free capital reserves and support changing business needs in a fluctuating economy:

Sample Scenario – Lease vs purchase comparison 

Suppose two similar companies sought to acquire new equipment with a market value of $5 million in January 2021 to meet projected future business needs. Company A purchased the equipment with $5 million from its reserves, and Company B entered into a customized lease to finance its use of the equipment over time. 

Company A immediately reduced its available cash reserves by $5 million.
Company B financed the equipment and maintenance costs over the useful life of the asset, resulting in monthly payments of $75,000, or $900,000 over the first 12 months.

If Company B pursued a lease payment structure with seasonality and unexpected economic events impacted its business, the potential impact on its liquidity due to changing market conditions may have been less.

If both companies faced significant, unexpected liquidity needs during the year, Company A may find itself less nimble because $5 million was spent upfront for its equipment. In contrast, Company B remains positioned well to sustain its current operations, adjust cash spending for other needs, and adapt its business model to 2022 and beyond market conditions because it retained approximately $4 million in cash reserves that first year. Moreover, depending on lease terms and conditions, the ability to upgrade mid-term or return the equipment may be available and position Company B to continue to scale its business while reducing the risk of equipment obsolescence.

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Fluid management, maximum control

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In an uncertain economy, most business owners opt for maximum control of capital equipment acquisition, use and disposition. Financing can help you shape that strategy. With mid-term upgrades and the option to renew the lease, purchase the equipment, or return your assets at the end of the term, you substantially lessen the risk of owning obsolete equipment.

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Tax appetite and depreciation

For many businesses, asset depreciation plays an important role in fiscal management. In fact, most equipment offers depreciation benefits. However, determining whether your company can use all the depreciation requires consideration—especially true for equipment-intensive businesses.

Full taxpayers who need depreciation’s sheltering effect may benefit from being the tax owners of equipment. You can accomplish this with a loan, installment payment agreement and some leases.

However, on an after-tax cost basis, companies that cannot fully utilize tax depreciation (or those subject to interest expense limitations) may find a tax lease more efficient.

Why a tax lease?

When compared to a traditional loan, tax leases typically provide favorable cash flows because the lessor monetizes depreciation and a residual investment in the form of a lower monthly payment. Tax leases also may allow the entire lease payment to be deducted as an operating expense on the business’s tax return – a potentially critical consideration for companies that wish to extend tax deductions over longer time periods.

Summary: Why financing matters now

Remember that equipment financing can be a strategic tool: It lets you acquire and employ assets immediately and develop a plan to achieve long-term goals. In fact, few if any other payment options offer financing’s wide range of benefits and flexibility. In addition, though current economic conditions have negatively impacted many businesses, financing is a powerful source of alternative capital, available now.
Finally, before you begin to acquire new or assess your existing equipment, it’s essential to seek an equipment financing professional who has industry expertise, a proven track record in lease structuring, and a clear understanding of your unique business goals. Together, you can begin to create a strategy to optimize your business assets and opportunities, both today and in the future. 
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