By Dan McKirgan and Derek Coe, senior managers with Wells Fargo Equipment Finance
As demand for construction in the Denver area soars, costs for resources and labor are doing the same. This recent squeeze has increased pressure on construction companies who typically enlist contractors in their bidding process for infrastructure projects, as it has become accordingly more difficult to navigate budgeting. At the same time, leasing volume in the Denver metropolitan region has risen by 73.1 percent quarter-over-quarter, according to CBRE research. With the economic environment growing increasingly unpredictable and equally as challenging, Denver developers are conflicted with balancing costs and operations while simultaneously managing risks and prioritizing innovation. In the face of this uncertainty, businesses should carefully consider leasing their construction equipment as a secure option to sustain and increase growth and profitability, versus purchasing or financing.
First, let’s identify the key differences between a loan and a lease. While loans may require some form of down payment depending on customer profile and equipment type, most leases fully cover financing including additional expenses like installation, maintenance, freight, and taxes. And, where taxes and budgeting are concerned, both loans and leases offer flexible payment terms and interim financing. However, as tax owners, lessors can pass along some of the benefits of depreciation through lower lease payments. When it comes to financial reporting, loans are usually recorded on a borrower’s balance sheet with debt as a liability, while leases are subject to the operating or capital lease treatment and must follow specific accounting rules. Another distinct difference between a loan and a lease is that leases transfer the risk of obsolescence to a lessor, while borrowers adopt the risks associated with asset devaluation that may come with technological advances and equipment wear and tear.
Now, let’s dive into some of the main reasons that leasing has become an attractive option for businesses given the current climate.
Improving cash management
Perhaps the most notable advantage of leasing equipment is that it permits companies to preserve their cash and maintain a steady flow of capital. By leasing, companies are more likely to finance the full cost of their equipment rather than tying significant capital to upfront costs. This also creates opportunities for reinvestment in other areas of the business such as marketing, inventory, and research and development. Businesses can also reduce their burden through leasing as this option often results in lower payments based on the equity position and tax benefits that the lessor takes in the equipment. In fact, companies can monetize the equity of existing assets through a sale-leaseback transaction, which allows for the reallocation of capital and debt reduction. Even more, payment options are more customizable and flexible as businesses can structure installments around cash flows.
If a customer needs equipment today but isn’t positive that they want to commit to long-term ownership, leasing allows them the ability to defer that decision-making for later. This flexibility additionally grants businesses the power to advocate for different needs or options in the middle of their term, including adding more equipment, buy-outs, upgrades and returns to the lease. Depending on the lease product, a customer may also be able to make strategic decisions at the end of their lease, too, like buying, renewing, returning, or continuing monthly rental of the equipment to better address future business requirements. A customer may also bundle both their equipment and service payments on an invoice to streamline maintenance and improve operational efficiency.
Mitigate utilization risk
By leasing equipment, companies are empowered to focus their time on maximizing equipment usage as opposed to worrying about logistics associated with owning equipment. Customers can also mitigate any risks related to capacity fluctuations by negotiating with the lessee to either replace or redeploy equipment at the end of the lease term. Leasing also deescalates utilization issues by allowing the customer to better manage any additional capacity that is needed during economic expansion but would otherwise cause a potential excess of capacity during other business periods. In the same vein, leasing can be tied to a particular project or contract. This then allows the lessee to accurately build in the true cost of equipment into their contract and their budget.
Limit asset risk
Beyond enhancing threat management with equipment utilization, leasing also limits the amount of risk that businesses take on when obtaining assets. As customers and consumers alike grow increasingly reliant on technology and innovation, leasing offers businesses the opportunity to stay current with the latest equipment and stray away from technological obsolescence as well as the risks this may pose to growth potential. The ability to return equipment at the end of the term can also reduce maintenance costs and improve uptime and productivity. In addition, leasing is a reliable option for business owners who are not experienced in the nuances of selling used equipment. Considering the volatility in the used equipment sales market is an ongoing risk for the customer, lessors can lessen the risks that customers take on by attempting to maximize the re-sale values of the equipment and thus providing the customer with better up-front pricing.
A New Lease On Your Equipment’s Life
Considering current disruptive financial forces like high-interest rates and persistent inflation, businesses can be initiative-taking in protecting against any potential threats that the economic environment may bring by choosing to lease equipment. Flexible payment structures can be catered around customer cash flows, allowing companies to be more strategic with their cash management and encouraging investment in other areas of the business. Equipment leasing options also reduce exposure to business risks including capacity fluctuations, technological obsolescence, economic cycles, productivity, and maintenance. Overall, while purchasing and financing have their merits, leasing equipment empowers businesses to navigate the competitive yet uncertain marketplace while preserving capital and mitigating threats.
About the Authors:
Dan McKirgan is a senior vice president and middle market regional sales manager for Wells Fargo Commercial Capital Equipment Finance. Based in Phoenix, Dan leads the West regional equipment finance originations team in 8 states focused on delivering equipment finance products and services to middle-market banking customers and prospects.
Derek Coe is a senior vice president and Wells Fargo Commercial Capital (WFCC) Regional Sales Manager for the Bank Channel of Wells Fargo Equipment Finance (WFEF). Based in Evansville, IN, he is responsible for a team of Territory Managers originating equipment finance transactions for Wells Fargo Bank and Wells Fargo Capital Finance customers and prospects in the East Region as well as sourcing opportunities for WFEF specialty businesses. Derek has extensive lease product and senior debt structuring experience and has deep domain expertise across a variety of industries and collateral types.