While the construction industry has joined virtually every business sector in enduring the pains of the recession, better times are on the horizon. Some segments of the industry are already seeing an uptick in project movement, particularly those that serve economic development and infrastructure projects.
As you position your business for these and other projects, there a number of factors that should be considered. One of the first is the tightened credit market, which continues to be a challenge for businesses of all sizes and in all industries. The good news is that there are a several different avenues for companies to take, depending on their individual circumstances. This also makes advance preparation more important than ever in managing your business’ procurement process and inventory level in the coming years.
The first step is to take a fresh look at your inventory, balance sheets, funding mechanisms and business development prospects. Then, forecast the kinds of equipment your business will need and for what time duration. Many companies have reduced their inventory to reduce overhead during the worst part of the recession. Does your current inventory put you in the best position to succeed? Or do you need to reallocate, upgrade or expand your inventory? And for what duration will you need each piece of equipment?
There are many options for obtaining the equipment that’s best suited to meet your business needs.
Purchasing New Equipment
Buying new construction equipment is an option for contractors or companies that have multiple uses for a specific type of equipment for a multitude of jobs. However, purchasing new equipment requires a significant financial commitment and is typically an option exercised by those that have the available capital or are in good financial standing with their lenders.
There are many financing options available in lieu of an initial capital outlay.
The American Recovery and Investment Act is freeing up funds specifically for the construction industry, making it easier to purchase both new and used equipment.
Finance companies are offering low interest loans that include TALF (Term Asset-backed Securities Loan Facility) and TARP (Troubled Asset Recovery Program). These funding mechanisms have been established to help free up capital in the lending markets. Contractors may borrow from creditors to obtain the equipment necessary to rebuild the industry and jump start the economy.
Also, when purchasing new equipment, time your purchase to take advantage of personal property tax assessments. Traditionally, taxing authorities assess property tax on owned assets at the end of a fiscal year. If you can delay the purchase until the next fiscal year you may be able to avoid paying property taxes for the current year. You will be responsible for the taxes on that equipment but you may as well get a full year’s service out of it. Delaying the purchase for this short time will help defer those costs and, at least temporarily, contribute to a stronger bottom line.
Buying Used Equipment
The used equipment market is a viable alternative for companies that are looking for a cost-effective way to boost their fleet without breaking the bank. By purchasing used equipment, contractors can usually save 40 to 50 percent off the cost of new. Many dealers and manufacturers also offer limited warranties on used equipment. This can be a great strategy for quickly and cost-effectively growing a fleet as your company’s business development pipeline grows.
It is, however, extremely important to take the necessary steps to ensure the used machinery that is being purchased is in good working condition. Look for sellers that provide detailed inspection reports that identify the strengths and weaknesses of the equipment and rate it accordingly. Online auction sites, like IronPlanet, are established used equipment portals and have a reputation in the industry for providing detailed inspection reports, maintenance records and guarantees on the equipment. Online auctions are an easy way to buy and sell used equipment without the additional costs associated with traditional auctions.
Several financing options are available to contractors interested in purchasing used equipment. In addition to individual lenders that provide low interest loans, TALF and TARP backed funding programs are available for financing used equipment.
The third option for equipment accrual is leasing. Leasing can be very advantageous in avoiding high overhead costs, especially if the equipment is only needed for a short time.
There are many different options to consider when determining the best lease agreement for the term of a project.
The easiest, and probably the most common, is working with a construction equipment leasing company. Most leasing companies will structure the length of the lease to fit the duration of a specific project, minimizing your financial commitments.
In a “true lease agreement” the lender assumes the risk of depreciation while the contractor (lessee) benefits from the off-balance sheet accounting treatment of the lease. The lender structures payments that fit the contractor’s needs, and at the end of the lease term the contractor has the option to purchase the equipment at fair market value or return it. If, at the end of the project, the contractor does not want to purchase the equipment, the lender can re-sell the machinery, usually through a third party auction company like IronPlanet. Lease payments can usually be written off as an expense. Check with your accountant to be sure.
Commercial finance agreements, such as leases, are available through banks and leasing companies. Traditionally, lease agreements structured by a contractor’s lending bank do not affect the contractor’s line of credit with the bank. Check with your banker to be sure.
As the economy continues to improve, the opportunities to re-establish or grow your business will multiply. Now is the time to make sure that you are in the best possible position to take advantage of those opportunities so take the time to thoroughly understand your business’ needs and options before making any decisions about equipment. Chances are that over time you’ll utilize a combination of these approaches as your business and equipment needs change.
John Gougeon is a national accounts manager with IronPlanet, a worldwide leading online auction company for used construction and agricultural equipment.