Six Tips for Navigating the Construction Equipment Financing Process
If you are concerned about cash flow for your construction business, you may be waiting to order new heavy equipment until after current projects are completed. While it is smart to focus on conserving cash, the decision to postpone asset purchases does not necessarily help you position your company to win more work.
Having a broader array of heavy equipment can help you win bids for projects that require more specialized equipment, as well as large-scale projects necessitating multiple pieces of equipment. A larger portfolio also helps increase equipment availability, ensuring that you can complete projects with less downtime, and deliver high-quality work on schedule.
Essentially, purchasing more equipment helps your company avoid obsolescence and maintain a competitive edge over rival businesses. However, buying new equipment is an expensive undertaking. A viable option to move your company forward is to consider funding heavy-equipment acquisitions through specialized asset-backed financing, allowing you to purchase more and better equipment that may otherwise be out of reach.
Here are six tips to help you navigate the financing process and decide if financing is right for your business:
1. Seek Heavy-Equipment Financing Instead of Tapping a Traditional Line of Credit
Every construction company needs to have a sufficient amount of working capital available to cover unexpected obstacles. Weather delays, change orders, late payments from customers and other challenges can impact cash flow significantly.
If you start to use some of that capital line to do equipment purchases as well, you will constrain your ability to have that working capital available for conducting day-to-day business. "Contractors don't go out of business because they have lack of work or poor performance on their projects. They go out of business because they have no cash,” said Carl Oliveri, partner and construction practice leader at accounting and consulting firm Grassi & Co, in a recent Construction Dive story.
Therefore, instead of tapping your traditional line of credit, utilize asset-backed financing for your heavy equipment purchases. This strategy will help you conserve your working capital and support your growth intentions.
“What differentiates heavy-equipment financing from other types of equipment financing is that it's for a very capital-intensive type of business sector,” states Christopher Johnson, SVP & President at Pitney Bowes Financial Services and its subsidiary, Wheeler Financial. “Critical equipment is the single largest line item on the balance sheet for small construction companies. It really is their lifeblood for doing business. Therefore, they need a lot of capital in order to compete. And yet, that capital is not always easy to obtain. In fact, at Wheeler Financial, we often see small construction companies struggling to gain access to capital to fuel growth.”
2. Select a Financing Partner that can Fully Support You
Whether you’re pursuing a loan or a lease for heavy equipment, the key is to work with a financing partner that can structure and tailor financing to your specific scenario. Choose an organization that is willing to invest the human capital, as well as the cash needed to support your business objectives.
Seek a partner that specializes in small-business financing, wants to collaborate with you, and is committed to finding the right solution to suit your company. This will help ensure that you get the equipment you need at a monthly rate you can afford.
3. Make Sure Your Financing Partner has Industry Expertise
You deserve a financing partner that understands the seasonal nature and risks of the construction business and, therefore, can help structure financing around your up-and-down stream of cash flow.
Ideally, seek a strategic partner with deep industry expertise and the ability to recommend financing options based on your company’s financial goals.
Be sure to ask direct questions, such as, ‘How many years has your organization been financing the construction industry?’ and ‘How exactly is your credit team qualified to serve construction companies with their asset purchases?’
“By asking questions like these, you can get a sense of how long that organization’s credit managers have been underwriting the construction space,” Johnson states. “You're really trying to understand two things: What is their level of investment in your industry, and what is their level of expertise.”
4. Communicate Your Desire to Build a Long-Term Relationship
Markets fluctuate, meaning you need a financing partner who is committed to your success for the long haul. By building these kinds of relationships, you position your business to take advantage of marketplace trends and opportunities when they arise, which a financial partner that already knows you, will be more apt to help you retrieve.
“The leaders of small construction companies want long-term relationships with their financing partners, because they understand we won’t always be in a bull market,” Johnson says. “They need experts who will understand them and be willing to work with them, through the best of times and also in the worst of times.”
5. Look for Consulting Capabilities
“When I meet with construction companies, I often hear questions such as, 'What are my options?’ and ‘How can I best maximize the credit availability that's out there for my company?’ and similar questions. These business leaders are seeking consulting advice,” Johnson says. “I also hear other questions: 'Should I buy this?’ ‘Should I lease this?’ ‘How do I better manage my fleet of equipment?' All of these types of questions that come up are really at the macro level.
These are smart business owners trying to figure out how they can get the most efficiency out of the assets that they have. The more efficiency they have, the more profitability they're going to drive. Therefore, they need a financing partner with the necessary skill set to decipher what's in that company's best interest, and to help its leaders become knowledgeable about what they should do to maximize the profitability in their business.”
6. Dig Into the Documents Related to Heavy-Equipment Financing
As you are setting up the relationship with your new financing partner, be sure to spend time studying provided documentation as early as you can in the process. The more you educate yourself, the better you’ll understand all the details involved.
Gearing up with new equipment is a strategic way to win more business. You can make it happen — and help your company thrive — by actively and thoughtfully widening your financing options.