Insights that go Beyond Finance

Mid-Term Rental Solution for Construction Equipment Dealers

Long term equipment for short term customer needs?

Understanding leasing options for your company’s equipment?

Leasing can offer a variety of benefits that cut across equipment types, such as maintaining cash or preserving lines of credit, avoidance of risk on asset utilization, and flexibility gained from having access to a wider range of funding options. Of course, each business will have to factor in its own situation and financial considerations. The decision must be company-specific.

For example, some companies always use operating leases. Why? Because operating leases—essentially, time-delimited rentals—make the most sense for markets and equipment that can change rapidly. These would include high tech equipment or high-use equipment that will have to be replaced every few years. On the other hand, some businesses employ much longer-lived equipment that can run for many years without needing any significant upgrades. In these situations, a more traditional loan or capital lease may be the best alternative.

The variables going into the leasing calculation, however, are not always easily defined. For many, the key question is, “What happens at the end of the lease?”

If it’s equipment that is central to the company’s operations and with a long useful life, some companies tend to avoid operating leases that have a fair market value residual or buyout. If the buyout or residual appears high, and having the lessor or bank reclaim the equipment will cause serious disruption to the business, then the company needs to protect its investment. For example, with the equipment racks filling a warehouse, you wouldn’t want somebody coming in and saying, ‘I’m going to tear out all of your rack.’ At the end of the fifth year if you are depending on these racks to run your business for the next 20 years.

This situation may require a guaranteed buyout provision for these leases, to avoid the risk of disruption when the lease runs out. Essentially, the policy is to ultimately “own something that has a long useful life”—like equipment racks—“and lease things that have a short useful life”—like technology or higher use equipment.

But wait—there’s more to it than that. What gets murky is the in-between. For instance, for one “fairly significant investment” your bias may be to buy it because you want to own it long-term. But the lender could come back with an attractive interest rate on an eight-year lease that had a five-year buyout clause. This way you could effectively own the equipment by leasing in the short term—for the first five years—and then buy at the end of the fifth year for a fixed price.

It’s the best of both worlds—so long as you know all the variables were nailed down, so it was measurable. For example, absent the protection of a guaranteed buyout that might push you over to short-term leases which you might use for items such as lift trucks or servers.

Roy Royer of Somerset Capital also weighs in on the need to consider a full range of options in the leasing market. “The more solutions you can come up with for customers where they feel like they have a little more flexibility, the better,” he says. For example, a company may start out with a relatively short 24-month lease for production equipment, because it’s booked a 12-month backlog of orders and the outlook for another 12 is good. By adding in a fixed purchase option, says Royer, “they basically know they can have a test period. Going in, they will know they can walk away in 24 months, if they want, or buy it for the fair market value.”

For more than 30 years, Somerset Capital helps our customers go beyond finance with services around the financing of equipment. By expanding options with our team of experts you can company to achieve more. Let’s talk.

The best way to lower your equipment downtime costs has nothing to do with maintenance

What is the biggest expense related to equipment operation for your business?

92% of small business owners, 87% of mid-sized businesses and 92% of large corporations all answered the question the same way: Maintenance downtime.

Whether it’s equipment rental, technician repair expense, loss of productivity and even employee dissatisfaction, there are a host of expensive factors that eat into the P&L of businesses and departments with strong equipment needs for operation. With the almost universal recognition of maintenance downtime being such a huge expense, companies must have a crystal clear view of the financial impact of this downtime, right?

What is the financial impact of equipment downtime?

96% of small business owners, 91% of mid-sized businesses and 84% of large corporations CANNOT answer the question with any degree of accuracy. They require the equipment to profitable operation, understand that downtime is the largest expense they face and they simply don’t know the financial impact of this downtime.

Could a lack of information lead to misguided decisions?

Of course. But it’s understandable. Companies require a wide variety of equipment to successfully operate and to think every company has a well refined view into the total cost of ownership that is updated annually for each asset class from $500 iPads to $20,000,000 barges is asking a bit much. A recent survey indicated that the average small business leverages as many as 8 different types of equipment to operate and the average Fortune 500 company requires more than 100 equipment types. Taking a pro-active view of that many asset types would require a ton of work, so companies typically lean a little too heavily on the “don’t fix it if it isn’t broken” approach.

Well…it will break. Almost all equipment will breakdown. So, for the most important equipment to your business, you might want to have a plan. To reduce these downtime experiences, companies focusing too heavily on maintenance, rental or “extra assets” on the books to use as replacements might be missing the point.

The real solution: Life Cycle Management

At what hours of usage do your lift trucks become less reliable? At what year of use do your servers struggle to keep up with data needs? At what mileage does rolling stock roll a little less effectively? Again, business stakeholders may not know the answer, but here’s why it’s important to take an educated guess: if you can reduce the exposure to end of life maintenance, you can improve productivity and strength the bottom line. Most equipment maintenance expense follows some version of an exponential curve:

In this example, if you could replace the equipment at year 6, you could avoid a terrific amount of maintenance downtime expense for all similar assets.

The important role of leasing

Leasing can help you pay for what you use of these assets, just for the period of time where they are not an administrative burden. In the above example, you could do a simple 6 year operating lease that maximizes cash flows, reduces capital outlays, keeps you on the cutting edge of this equipment technology and helps you avoid the big impact of maintenance down time issues. Or you could do 6 year lease with a purchase option that gives you the flexibility to redeploy this asset into lower usage operations, reducing the maintenance burden and still enabling an affordable way to put newer assets to work in the higher usage application.

Looking at equipment usage this way might be the best way to reduce the burden of maintenance downtime, keep you on the cutting edge of technology and potentially be more affordable than what you are doing today. Leveraging leasing to power these solutions is an important consideration for success.

For more than 30 years, the Somerset family of companies has redefined equipment finance. We take our clients further by providing services around the financing of equipment for mid-sized and large companies throughout the Americas, Asia and Europe and offer finance solutions can help you with a life cycle management approach. We help you think bigger and go beyond finance. Let’s talk.

Total Cost of Ownership (TCO) and the finance decision.

The big picture includes the total cost of a solution, above and beyond the thing itself— services, maintenance contracts, and all those extra pieces that turn the piece of equipment from a dumb box into a smart, connected machine. It also includes understanding the opportunity cost. Will this machine replace a less efficient machine? What happens to my business if I don’t have this equipment? And if I do have it, what other costs are involved with running it?

When considering adding assets, leading CFOs say TCO—total cost of ownership—is clearly part of the transaction’s bottom line. Forecasting everything, right down to the bank conveyance, they pretty much know all the costs for the asset. They know the cost to staff it. They know the cost to maintain it, etc. They’re forecasting the full P&L, all capital investments they make.

Lindsay Kraycar, a Senior Regional VP with Somerset Capital, provides an example of how TCO can influence equipment decisions: “A good finance officer will look at two trucks that are five years old, and will say, ‘Our maintenance costs last year on these trucks was $10,000, and we were averaging 4.5 miles a gallon. If we get a new truck, the warranty will cover the maintenance costs. Therefore, those costs will go away, and we’ll have a payment of $1,900, but we’ll also get 7 miles a gallon versus 4.5 miles a gallon.’”

These days, maintenance costs are just as likely to include software upgrades as they are to include oil changes. When a company is installing a million dollars of laptops, that’s great. But understanding the software needs, maintenance and help desk support system just begin to round out the TCO.

Technology is changing the face of financing decisions, especially with things like copiers, information technology, or medical equipment as software and services are becoming a bigger part of the deals. But there is more software and services within all kinds of equipment. There are the diagnostics that you use to measure performance of your trucks and trailers. There are telemetric devices that you put in your fleets of cars. Even for something as basic as machine tools and printing presses, you are finding front-end systems that run them. People aren’t just standing at the machine and cranking things out anymore. They run it via a control network.

As a result, smart lessors now have the ability to bundle all of those things into a transaction and offer our customers a seamless product, with leasing and servicing all on the same invoice. Equipment-driven lessors offer an even easier solution as their depth of equipment knowledge makes the “bundling” of TCO an easier process.

For more than 30 years, the Somerset family of companies has redefined equipment finance. We take our clients further by providing services around the financing of equipment for mid-sized and large companies throughout the Americas, Asia and Europe and offer finance solutions that can help you meet your dynamic equipment needs. We help you think bigger and go beyond finance. Let’s talk.

Equipment needs that reach beyond rental, but are shorter than “long term”

In a dynamic business climate that hastens the need for revenue producing commercial equipment among mid-sized and large companies, meeting the financial and operational demands can be challenging. The expense of commercial equipment is outpacing capital budgets and customer contracts require increasing flexibility to stay competitive in a global marketplace. Financial, operational and procurement managers might struggle to strike the right balance between short and long-term equipment needs. Let’s unpack these issues and propose an alternative.

Rental: The high cost of flexibility

Commercial equipment rental fills an important operational function for many companies. Whether a seasonal surge in warehouse activity or maintenance replacement, rental offers a flexible way to acquire the needed equipment with the flexibility to return the equipment when the short term situation passes. But what happens if the need for the equipment is a bit more undefined? What if the length of usage could extend beyond a few months to even a year or more? In these situations, while rental will still offer return flexibility, it comes at a premium price. Carrying that premium month after month becomes an expensive way to achieve flexibility.

The inability to commit to “long term”

The lowest cost way to acquire equipment is by taking a longer view. Owning, leasing or otherwise financing equipment with a 5-7-10 year or more horizon can dramatically improve cash flows and cash position. But what happens when the customer contract is only 22 months? What if what you thought was a temporary increase in volume is starting to feel a little less temporary—but not quite permanent? Paying cash for equipment ownership, in addition to cash flow and other problems, becomes a poor option because you become the owner of equipment for a still yet-to-be-defined need. Bank loans are a more affordable way to acquire the asset, but essentially deliver the same “long-term ownership for a “shorter-term” need conundrum. Leasing from a financial services company is affordable but essentially the same as a bank loan in terms of the payment obligations and its requirement to cover the total cost of the asset. So, how can you strike the right balance for your short and long-term needs?

The solution: The equipment-driven leasing partner

Shockingly, most equipment leasing companies know startling little about the equipment they are leasing. They have evolved into a “money-center” lender that is simply looking for yield above the cost of their money. They have little knowledge of the equipment market, resale values and would have little knowledge of how to handle the equipment should it be returned. But there are few equipment-driven leasing companies that break the mould. Their value proposition is driven from the deep experience in the purchase, finance, management, sale and disposal of commercial equipment, bringing solutions that go beyond financing. These partners offer mid-sized and large companies a more intelligent approach. One that offers rental, short-term leasing and long-term leasing and more to meet a wide variety of needs across a wider variety of commercial equipment. They can match the lease to the shorter customer contract or offer the financial benefits of longer term leasing with flexible turn-in provisions. And they are able to do this, because they know the equipment, how your company deploys the assets and can create unique solutions the “money-centered” folks overlook.

For more than 30 years, the Somerset family of companies has redefined equipment finance. We take our clients further by providing services around the financing of equipment for mid-sized and large companies throughout the Americas, Asia and Europe and offer finance solutions that can help you meet your dynamic equipment needs. We help you think bigger and go beyond finance. Let’s talk.

Staying on the cutting edge of technology without breaking the bank

When thinking about the pace of technology, we are often drawn to cloud based software or unbelievable advances in mobile devices, but for mid-sized and large companies some of the most impressive technology advances can be found in your mission critical commercial equipment. With CAPEX budgets always under some pressure, how can your company stay on the cutting edge of technology without breaking the bank?

The importance of life cycle management

Technology advantages born from newer equipment usage offer great efficiencies and even increased revenues for your company. But to keep the pace, the first course of action is to develop a plan. For each asset class, determine the optimal life cycle based on your company’s usage of the asset. From there, develop a plan to acquire, finance, manage and dispose of each asset class. Make sure the plan is a collaboration of cross functional areas of your organization and perhaps most importantly, engage outside experts. Talk to companies with deep knowledge of the new equipment, secondary market values, finance strategies that maximize each budget dollar and end of life disposition strategies. Finally ensure each asset class plan is well documented and subject to annual review by the team.

Leasing, Rental and all things finance

With technology moving faster and life cycle plans in place, now it’s time to think about how to allocate capital. While there is an abundance of financial engineering offered by banks, the questions for your company are far simpler. Why would we really tie long term capital to depreciating assets? Can we find better return on capital than CAPEX?

Pay for what you use.

If the asset is depreciating rapidly, you want to avoid messy end of life situations with disposal and maintenance and you’d prefer to stay on the cutting edge of the equipment technology…just pay for what you use. A competitive rental structure for shorter term needs or lease for longer tern needs could be the financial backbone that powers your life cycle management plan in each asset class. Simple monthly payments in a defined life cycle that reduce maintenance expenses, downtime and increases your ability to have newer technology without the heavy capital outlay of ownership.

Not all leasing is the same. Equipment expertise matters

A good leasing provider should be able to help you with short term needs, long term enterprise wide assets, be flexible with location management and even extend your strategy beyond borders to your international operations. This partner should realize that competitive financing is only part of the solution because their deep experience making markets in the assets you count on drives a big part of the strategy.

At Somerset, our equipment knowledge drives better, more flexible financial solutions for our customers and a more intelligent approach to equipment finance. Staying on the cutting edge of technology across the variety of your asset needs is about more than money. It goes beyond finance. Let’s talk.

Do equipment finance companies really add value?

Mid-sized and large companies have long counted on leasing, rental and other financial solutions to manage their equipment needs. Over the last several years, more traditional equipment loans, structured capital leasing and simply paying cash have risen in popularity as financial managers approach capital expenditures with a wide variety of highly engineered methods of equipment acquisition. And over that time, the one important item that seems to be getting lost in the process is the equipment itself.

In a 2015 survey of senior financial decision makers, 68% made the financing decision without any knowledge of equipment life cycle or usage

While this is shocking, it’s not altogether surprising that the finance managers and operations managers within a larger company may not be well connected on every matter. But with more than 70% of every piece of commercial equipment being financed in some way, what is the role of the equipment finance company? Where is the expertise in the equipment usage that guides operations managers with life cycle strategies to reduce costs and increase efficiency? Where is the asset-driven secondary market expertise that assists finance leaders in making the best decision for allocation of funds? Have equipment finance companies lost the connection…and even the expertise…with the equipment?

Without real consultative recommendation on a better way to acquire, finance, manage and dispose of the assets to be procured, equipment finance conversations become exclusively about financial engineering and lowering the cost of capital. And while these are important factors for any business to address, they are just pieces of the puzzle.

To add value, equipment finance experts should start by deriving insights from a deep understanding of:

• Equipment usage. An equipment financier should make an investment in understand equipment usage long before they invest in the equipment itself. Determining the optimal life for each equipment class, understanding the operational needs of asset management and understanding international factors are just the beginning of the information required to build the right financial solution.
• Budget limitations. Often CAPEX needs at the operational level seem to outpace the planned budget allocation for these assets. An equipment finance company should understand both the operational and financial budget implications of asset acquisition and offer solutions that maximize the equipment in place for each budget dollar.
• End of life. Alarmingly, few mid-sized and large companies have effective end of life strategies for all of their asset classes. An equipment finance company should bring extensive experience with the secondary market of these asset classes to guide companies on the best financial options for disposal. And once defined, incorporate the end of life value so as to minimize the budget impact and secondary market risk of each equipment purchase.

And that’s just the beginning. At Somerset, we think equipment knowledge makes a huge difference. Equipment acquisition and management is about more than money. It goes beyond finance. In fact, we make markets in the sale of commercial equipment and bring that deep understanding to deliver more flexibility, innovative financial solutions and a more intelligent approach to equipment finance.

How can we help you go beyond finance?