Advantages to Equipment Financing
by Alexandra Myers
Despite the recent decline in commercial printing volumes, the art of commercial printing is far from dead and gone. According to an IBISWorld Global Commercial Printing research report, industry revenue is forecasted to grow in the next five years.
But, what are the challenges facing the commercial printing industry? Two printing giants, R.R. Donnelly and Quad/Graphics, believe that digital substitutions, the erosion of print-based marketing and a highly competitive market contribute to the decline.
Quad said, "Marketers and publishers are allocating their marketing and advertising spend across the expanding selection of digital delivery options." R.R. Donnelly mirrored the sentiment in its report by saying, "The highly competitive market conditions and unused industry capacity will continue to put price pressure on both transactional work and contract renewals across all segments."
Light at the end of the tunnel
The goal is, of course, to see the industry numbers improve year-over-year. Every business can play a role in that growth by recognizing the need for top-notch equipment and technology. Because of this need, the demand for replacing equipment is increasing. According to the Lease Foundation in a 2014 report entitled "Equipment Leasing & Finance U.S. Economic Outlook," investment in equipment and software is expected to grow by at least 5.5 percent over the next year.
In September, the Lease Foundation asked business executives about their need for equipment and software and how they planned on accessing it in Q4. Their responses indicated a promising future ahead.36.4 percent of respondents said they expected business conditions to improve from September to December. 30.3 percent of respondents believed demand for leases and loans for capital spending will increase through the end of 2014, and 15.2 percent of executives had expected to access more capital to fund equipment acquisitions over the next four months. In addition, another 15.2 percent of respondents believed their company would increase spending on business development activities over a six-month period.
In an updated report from the Equipment Leasing & Financing Foundation, published on December 15, 2014, the outlook of equipment investment is high in 2015. The report states that growth is expected to remain strong throughout next year and come in at about six percent.
Why finance printing equipment?
Investing in new equipment will help elevate a business in more ways than one, and leasing may be a smart choice for financing.
Letís look at it this way: If a business has $10,000 in the bank and a big job is on the horizon that will cost $8,000 to successfully perform, that only leaves $2,000 in the account for future needs, such as salaries and overhead costs. Even though the money spent on the job eventually will be recouped, itís important to manage the cash wisely until the job is completed and the invoice paid. Equipment leasing may provide a solution.
In addition, leasing eliminates the need for a hefty upfront payment upon purchase of a new piece of equipment, allowing business owners to start reaping the benefits of new equipment even sooner. Being able to lease equipment over time also allows businesses to budget accurately month-over-month with a predictable payment. The lack of a huge upfront cash burden also ensures clear cash reserves for other expenses.
Businesses also may be able to enjoy significant tax breaks when equipment is leased. The entire lease payment, unlike a regular loan payment, could be deducted as an operating expense in the period in which itís paid. This reduces the overall cost of the lease. In addition, payments are treated as expenses on the income sheet, so there is no need to worry about depreciation. However, it is important that each business talks specifically about this to the finance company and/or accountant to properly navigate what would be best for each individual tax situation.
What to consider before financing
When approaching a lender about financing, there will be a few questions before starting the process. The first is to understand why the business wants the equipment. Will the purchase assist in expanding the income potential or market appeal of the business? Is this an upgrade to existing equipment to get something that is more cost-effective, more green or an overall better product? Does the existing equipment no longer function at capacity?
Other factors of interest to a lender include whether or not a warranty is included in the anticipated purchase price. If the business plans to purchase a warranty with the new machinery, a lender may roll that into the financing package. Also, consider the installation costs. Will there be costs to bring the equipment in and install it? Will there be costs for training so staff members can effectively use the new machine?
Does the existing facility have the needed space for the new equipment? If a wall will need to be knocked down, other minor facility improvements are necessary or proper electrical hookups for the equipment need to be installed, many lenders will consider including these costs in the financing package as well. Finally, is there additional software that the equipment will need to run properly or to assist in daily use activities? Bringing all of these ancillary costs to the table when speaking with a financial lender will significantly help move the process along.
Lastly – and perhaps the biggest piece of the financing puzzle – is this: How will having this equipment help move the business forward? Lenders want to make sure they are making a smart investment – an investment that will improve a business while also ensuring the owner can make consistent payments on the leased equipment.
Will the equipment help save money in the long run? Explain. What may be obvious to those involved in the industry – reduced repair costs or eliminating the need to outsource jobs – may not be obvious to the lender.
Having new equipment also could help open new markets. When a business has the collateral and manpower to produce more product, new opportunities could open in other areas, which, in turn, could generate more revenue. In addition, investing in equipment could help a business reduce waste. Itís important to understand the impact equipment will have on a business before taking the next steps on the financing journey.