The COVID-19 pandemic may have ravaged the economy for the past year and a half, but for some small businesses, now may be the right time to expand by purchasing new, revenue-generating equipment.
Whether you’re a construction company looking to purchase a new excavator, a medical or dentist office seeking a new x-ray machine, or a manufacturer looking for a new CNC processor, equipment is the lifeblood of your business, as well as the key to growing your revenue streams. Current economic conditions such as low-interest rates, deal-hungry lenders, and fewer competitors may make this the perfect time to grow your business by seeking favorable payment options for new equipment.
“The accelerated pace of administering vaccines, the passage of three major relief packages, substantial, pent-up demand and reopening and returning to normalcy are all fueling growth, which bodes well for the equipment financing industry in the months ahead,” said Ralph Petta, CEO of the Equipment Leasing and Finance Association (ELFA).
According to Mark Cisco, Director of Equipment Financing at Kapitus, the slowdown during the pandemic only adds to the attractiveness of equipment financing.
“A lot of companies are coming off that slow time during the pandemic, so looking into equipment financing will help them gain that revenue that they can get from new equipment,” he said. “They can add that equipment to their team, and that revenue is going to change everything for them.”
Low Rates, Flexible Lending Plans
The three main reasons why equipment financing is attractive right now:
- The target federal funds rate is currently at zero to one-quarter of 1%, making the cost of borrowing low right now. The outlook is not expected to change anytime soon as the U.S. economy claws its way back to normalcy.
- The economy is expected to show strong growth over the next year, and small businesses have to be ready to expand. One of the best ways for many small businesses to accommodate growth is to add new equipment that will enable companies to handle higher customer demand and increase revenue.
- Equipment financing lenders are seeking to rebound from the pandemic and are willing to offer flexible payment plans and deals, and are willing to view the pandemic as an extraordinary event and consider the three-year financial statements from an applicant, rather than hark on the fact that business was lost over the past year.
“A lot of times [applicants] will come in and say, ‘listen, here are my bank statements or my financial statements for the past three years,” said Cisco. “Obviously, during the pandemic, revenue fell and … there’s not much we can do about it,” he added. “But when it comes down to it, we can give them a bit of a break.
“We do look at their revenue stream before the pandemic and we expect it to get back to normal if it hasn’t already. We look at their pre-pandemic financial statements and say, ‘hey, this looks great.’ Revenues obviously took a dip during the pandemic, but we’re expecting you to get back to normal. We can take it as these businesses are about to hit the same thresholds that they were hitting prior to the pandemic.”
Petta emphasized that during the pandemic, many equipment financing and leasing companies agreed to restructure payment streams and extend deferral relief to clients and plan to continue to do so as the pandemic nears an end. He added that some financing firms are still willing to offer flexible financing packages to allow for seasonal business fluctuations lower monthly payments while a specific project that involves the piece of financed equipment is just beginning.
Best Sectors for Equipment Financing
A report last month from the Federal Reserve Board showed that some of the hardest-hit sectors were leisure and hospitality, travel and restaurants. Other sectors, however, did not fare as badly, and companies in those industries are already seeing growth and therefore, may want to seek new equipment to accommodate that growth. Those sectors are:
If you’re a small construction firm, you may have already noticed an uptick in the need for construction services as the population flight from large cities to suburban and rural areas continues. Per a recent report by the Equipment Leasing & Finance Foundation, Equipment Finance in 2020: Special COVID-19 Impact Issue: “The reported demand for construction equipment has increased in response to demand for single-family homes in less populated areas.”
Although the business death rate for construction firms was roughly 10% in 2020 according to the Fed’s report, the increased demand for new homes and fewer construction firms to compete as a result of the pandemic makes this a stellar time to expand your construction business by locking in a good rate for a new excavator, backhoe or other pieces of equipment.
If you’re a small health care firm or independent practitioner, or even a non-healthcare firm in need of medical devices, 2021 could be a great time to finance new equipment. Health care firms expectantly soared since the beginning of the pandemic, as it was one of the few sectors of the economy that showed a positive growth rate in 2020. That growth rate is expected to continue throughout this year.
“Virtually every sector of the economy will be investing in medical equipment as firms attempt to reopen as they cope with the pandemic,” Petta said. “For example, some firms might install devices that automatically measure temperatures of customers entering their store.”
Agriculture and Manufacturing
The need for equipment by small agricultural and manufacturing companies stayed on pace since the pandemic began, said Cisco, and as the economy continues to regrow, those companies should seek to expand their revenue stream by financing new equipment. An added benefit, besides low-interest rates, is that agricultural and manufacturing equipment tend to hold their values.
“Agriculture and manufacturing equipment actually tend to hold their values for a very long time,” said Cisco. “So you can buy them and you can sell them for almost the same price. “It’s not like you’re buying a car and whenever you go to sell it, it’s half the value. That equipment is really great for us as it truly holds its value, gets its use and it creates revenue [for the business buying the equipment], and that’s what we’re looking for as lenders.”
The Foundation forecasts that software investments by businesses will grow by 11.2% in 2021. “Equipment and software investment is a subset of overall business investment and the lifeblood of the equipment finance industry, so we expect the industry to benefit from this strong economic activity,” Petta said.