Why Leasing May Be The Better Financing Option and Four Questions to Ask Your Financial Partner
4 minute read time
Manufacturing, distribution and logistics companies are grappling with a difficult combination of factors right now. Most of the owners and executives we talk with continue to see strong business opportunity, despite economic concerns. However, they’re struggling to take advantage of those opportunities because of persistent labor shortages.
In many cases, the most practical response is to upgrade equipment to bring more efficiency, including automation. In turn, employees can be cross-trained on multiple pieces of equipment—making it possible to accomplish substantially more with existing staff.
Over the last six months or so, we’ve seen some pullback in equipment financing as company owners and executives grapple with interest rate increases and a potential looming recession. A million-dollar piece of equipment may become harder to rationalize when higher financing costs are involved.
However, based on conversations at businesses around the region, we think an uptick in equipment financing is likely in 2023, for three reasons:
- Barring a recession, business leaders will need to turn to automation and other efficiencies to keep up with business opportunities.
- Owners and executives know they must plan ahead. Equipment lead times are generally two to three times longer than normal. For example, a client of ours obtains replacement tanker trucks each year. Usually, the lead time is three to four months, but at present it’s running more like eight months. Many supply-chain issues have resolved from a year or two ago, but specialized equipment is by no means back to pre-pandemic availability.
- Most equipment has a known useful life. Manufacturing companies, for example, may aim for about 5-7 years before replacement. Getting behind on replacements can mean substantial interruptions or even shutdowns.
Leasing (vs. traditional financing or using your working capital line of credit)
Large companies have long embraced leasing as a financing approach to durable equipment. Over the years, we’ve seen more and more small business and middle-market companies recognize benefits as well. Compared with traditional financing (or utilizing your working capital line of credit) leasing may mean preserving available cash and booking higher returns on assets. Leasing can also help ensure financing aligns with the equipment’s useful life.
If you’re a consistent lessee or thinking about leasing for the first time (or it’s been a while), here are four questions we recommend asking a possible financing partner.
1. Does your financial partner understand your business?
- Is your business cyclical, seasonal, or tied to a specific commodity? These are important factors when structuring financing. We are focused on Wisconsin companies, and truly understand manufacturing and distribution.
2. What types of leasing options are offered by your financial partner, and is there a 100% financing option?
- At Johnson Financial Group, our well-developed leasing specialty means we understand equipment very well—from manufacturing equipment, to trucks and trailers, to yellow iron. This intimate knowledge generally translates into an ability to structure highly competitive financing. In some situations, we can also finance certain soft costs, such as delivery and installation.
3. Does your financial partner understand current tax implications to leasing?
- There’s a new ASC-842 (Accounting Standards Codification) highlight on leasing. We are always happy to partner with our clients’ accountants and attorneys, working together as a team to structure what’s best for our clients.
4. Do you coordinate with the equipment manufacturer/vendor and how do payments work?
- Given supply chain snags and extended delivery terms, the period from your initial equipment order to taking delivery, is subject to uncertainty and delays. Our approach when structuring lease financing is to proactively engage with the equipment manufacturer/vendor on our client’s behalf, if warranted.
- With rising interest rates and, again, extended delivery schedules, companies want to avoid paying for assets they don’t yet have possession of. Our approach is to structure interest-only financing payments while an equipment order is pending. We also understand that things don’t always go as planned, and we get it. We work with our clients to be flexible when there are delays or unforeseen circumstances.
In closing, we are a resource for our clients, and can be for you too. We recommend sitting down with your Johnson Financial Group Advisor at least annually to review your capex budget so we can provide financing options before an equipment order is made.
Contact a Johnson Financial Group Advisor to discuss your unique leasing needs. We’ll help you determine the best structure to fit those needs.