A strategic alternative for raising needed capital
Many companies view equipment finance as a useful tool to support – through leases or loans – the acquisition of capital goods they need to operate and grow their businesses. Indeed, domestically, equipment finance accounts for $1 trillion in business annually Disclosure 1 , as organizations use it to acquire everything from manufacturing and mining machinery to IT equipment and software to trucks and transportation equipment. In doing so, they preserve capital, achieve tax benefits and realize a host of other advantages.
But for many organizations, equipment finance could do even more. The key is looking at equipment finance in a new light – as an administratively efficient, low-cost strategic alternative to traditional bank loan products for raising short-term capital.
Financing that affords flexibility
Exploring the possibilities of equipment finance makes good strategic sense during economic times like we’re in today – at the end of a long growth cycle with most economists anticipating a downturn sometime in the next few years.
Companies in cyclical industries, in particular, can benefit from the flexibility leasing equipment can provide compared to using traditional bank loans to purchase and own business equipment.
The return option at the end of a fair market value lease provides the flexibility. If a company such as a construction or trucking firm owns its equipment, and due to economic conditions experiences a significant reduction in business, the consequences could be severe, including the need to lay off employees. However, the financial strain of a business downturn can be eased if the company is leasing its equipment and can simply return it to the lessor at the end of the lease term, rather than continuing to manage the asset or taking on the responsibility of selling it.
When the end of a business cycle is in sight, like now, it can become more attractive for some businesses to take advantage of shorter-term equipment lease options, such as a 3-year lease term instead of a more typical 4- to 7-year term.
Just by leasing a portion of annual capital expenditures, a company can often better manage economic uncertainties.
A tool for balancing your liabilities
Equipment finance can also be a tool for ensuring your company has the right balance of fixed- and floating-rate debt. A BB&T Equipment Finance client provides a good example. In the past five years, BB&T has worked with a construction equipment dealership and rental company in Texas to help it maintain the balance it wants by tapping into about $100 million in fixed-rate lease financing across multiple transactions.
The company does a lot of variable-rate financing to fund day-to-day operations through senior revolving credit agreements or term loans but was looking for a financing vehicle that would allow it to fix a portion of its debt load – without entering into an interest rate swap requiring special accounting. The solution has been to use a synthetic lease product to finance the construction equipment it rents.
Leasing has offered the company a number of advantages over traditional bank loans or bond financing. Leasing requires less administrative work and – unlike the other financing alternatives – offers the company a feasible early-termination option.
The lease financing is secured by the collateral in the company’s rental fleet. From time to time, its rental customers will decide after only a year or so they have a long-term need for the equipment and will purchase it from the dealership, ending the rental agreement. The company then pays down the pro-rata portion of the synthetic lease at a minimal breakage cost, usually less than 2%.
Using the synthetic lease, the construction equipment dealer receives the fixed-rate debt it wants, balances out its debt portfolio, assumes very little administrative expense and gains the ability to prepay the lease at a fraction of the breakage costs it would pay to terminate other financing instruments. Additionally, BB&T can close these equipment finance transactions very quickly; the dealer received the $15 million from its most recent transaction in just eight days.
Flying higher by leveraging unencumbered assets
Another BB&T client, a privately owned food and agricultural company, has used equipment finance to leverage its growing fleet of airplanes and obtain attractive financing.
The company had a fleet of aircraft it had not historically financed. But when its latest acquisition grew the fleet to $35 million in value, and the company was doing some real estate transactions that required financing at about that dollar level, the aviation finance experts at BB&T explained how it could leverage its fleet to meet the new financing need.
An equipment finance loan – a cash-out refinance – through BB&T enabled the company to quickly generate the capital it needed to acquire the real estate. Equipment finance allowed the company to access the necessary capital at much less cost and with fewer fees than bond financing would.
As just one example of the efficiency of this strategy, using the aircraft as collateral rather than other real estate it owned enabled the company to save significantly on appraisal costs. Appraising a few planes cost the company thousands less than it would have to appraise real estate of similar value.
A strategic capital partner
Finding opportunities like the ones described above requires treasury managers to see equipment finance in a new light. It also requires you to view your equipment finance providers differently – and seek more from them.
It’s fairly typical these days for companies to think of equipment finance as a commodity product. Companies know the structure they want, they describe it in an RFP they send to providers, and they often simply choose the provider offering the best rate.
But there’s a better approach that affords greater value: When you look for an equipment finance provider, seek a strategic capital partner that can provide creative solutions.
At BB&T, that’s a role we’re comfortable in. If you have unencumbered equipment, we can show you how to use equipment finance as a less costly and burdensome alternative to traditional financing methods. If you want to learn more, contact your relationship manager.
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The information provided should not be considered as tax or legal advice. Please consult with your tax advisor and/or attorney regarding your individual circumstances.
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BB&T Equipment Finance is a wholly owned subsidiary of Branch Banking and Trust Company.
According to the Equipment Leasing & Finance Foundation’s 2017 State of the Equipment Finance Industry Report.
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