3/20/2012 8:29:00 AM
As the manufacturing industry grows more robust coming out of the economic downturn, many manufacturers and traditional metal-bending companies are looking out over their plant floors at unreliable and outdated equipment stretched far beyond its useful life.
Like businesses of all sizes and types, manufacturers also are searching for options to address the challenges of acquiring new equipment without large outlays of cash or losses in operational flexibility.
Faced with a fresh need for new equipment, many manufacturers are considering equipment loans and leases, as well as the exclusive tax-exempt options, as a way to reach the next level in production, sales, and profitability.
In the broader market, equipment financiers are seeing a healthy pick-up in demand as confidence in the manufacturing sector grows and expansion begins. This swelling of demand calls for a return to the fundamentals of equipment financing, which can apply to just about any type of equipment, including the traditional drills, grinders, molds, presses and rollers, as well as the new technology or technological upgrades that increase output and can be bundled into a financing agreement along with the costs of installation and training.
Equipment Financing Fundamentals
How should manufacturers get started By first considering these 12 benefits of equipment financing:
- Tax treatment: The IRS does not consider certain equipment leases to be a purchase, but rather a tax-deductible overhead expense. Therefore, manufacturers can deduct the lease payments from income, thus reducing the net cost of financing.
- 100% financing: Since leasing often does not require a down payment, it is equivalent to 100% financing. Manufacturers can conserve the capital that would have been used for a down payment and reinvest it in the business.
- Immediate write-off of the dollars spent: With certain equipment leases, payments are treated as expenses on the income statement, so the equipment solution does not have to be depreciated over an extended term.
- Flexibility: As facilities grow and needs change, the manufacturer may be able to add or upgrade technology at any point during the financing term.
- Asset management: Equipment leasing can provide for the use of a technology solution for specific periods of time at fixed payments. The financing company assumes and manages the risk of technology ownership. At the end of the financing term, if the manufacturer elects to return the technology, the financing company is responsible for the disposition of the asset.
- Upgraded technology: Technology solutions that could depreciate quickly should be leased to limit a manufacturer's risk of getting caught with obsolete equipment. Plus, leasing makes it easier to upgrade or add technology solutions to meet ever-changing needs.
- Streamlined processes: Leasing can allow you to respond quickly to new opportunities with minimal documentation and red tape.
- Improved cash forecasting: When manufacturers lease equipment, they can accurately forecast the cash requirements for the equipment since they know the amount and number of lease payments required, and with leasing, there are no floating fees.
- Flexible end-of-term options: There are typically three flexible options at the end of a term. The lessee can return the equipment, purchase the equipment from the financing company or extend the lease for an additional period of time.
- Tax benefits: For companies who do not need MACRS depreciation resulting from owning equipment, tax leases can be utilized to pass along the tax benefits in the form of lower payments. For companies who want the depreciation benefits a non-tax lease or loan can provided.
- Easier financing than loans: With equipment leasing, manufacturing facilities can avoid requirements like compensating balances, large down payments, client list reviews and cash-flow projections, making the finance process faster and easier.
- Finance services: Training, support and other services are some of the most important components of a new equipment acquisition, particularly when obtaining new manufacturing technology. Yet these "soft costs" are some of the most overlooked during the decision-making phase. Often, everything involved in a technology purchase,