There’s no shortage of financing options for construction-equipment suppliers.
Given the overall size of the US market for capital equipment financing — now approaching $2 trillion a year by one estimate — it makes sense a host of banks and non-bank lenders would have crowded into the field, eager to help builders get their hands on the equipment they need to do their jobs at rates they can handle.
We’ll look at how these financiers generally operate and suggest a surprising alternative for savvy equipment suppliers in the form of tech-enabled in-house financing as an option that could help them trim costs, make money, boost efficiency and enhance the value of their customer relationships.
Different kinds of borrowing
Construction-equipment financing refers to loans used to purchase business-related equipment — bulldozers, say, or backhoe loaders. It provides for periodic payments that include interest and principal over a fixed term. This applies to any sort of work-equipment financing, whether the item in question is a pallet of surgical gloves or a jumbo jet.
Though some big-name lenders like Citigroup and Wells Fargo are generalist financiers, many smaller players specialize in particular industries. Some in this category are thought more suitable for the construction equipment, while others cater to companies in search of office equipment, or used gear. Still, others support enterprises that lack credit standing, often because they’re startups. And of course, each is priced according to the risk the financier has to assume.
There’s another third-party option, however. “A business looking to secure equipment it can’t buy outright may try to secure a business loan or line of credit,” says Elena Ionenko, co-founder and chief operating officer at lending-platform innovator TurnKey Lender. “But with equipment financing, the equipment itself serves as collateral, making it easier for the lender to repossess the asset should the loan go into default.”
For borrowers, this makes equipment financing less risky, easier to secure, and generally more cost-effective than securing a loan that isn’t specially earmarked for specific equipment.
But here’s an important caveat: equipment financiers typically balk at lending more than 80% of the equipment’s cost, leaving borrowers to cover the balance in a substantial down payment. For this reason, some construction companies prefer a third alternative: leasing.
What your customers are thinking
Companies typically decide whether to finance or lease based on the following criteria.
- Obsolescence Capital equipment that quickly wears out or becomes obsolete may be a candidate for leasing — provided the gear isn’t worn out before the lease term expires or there’s contractual provision to keep the lessee from having to keep paying for broken equipment. Lessees also avoid having to worry about disposing of outdated equipment.
- Timeline and Budget In the traditional view, if the equipment is needed for more than three years, secure the financing to buy it (if you can’t buy it outright). Although leasing usually offers a change to get up owning the equipment, financing tends to be cheaper. But if the company is planning to buy the equipment once the term of the lease has ended, the company is likely to end up paying more than it would through financing. Leases tend to carry smaller monthly payments than a loan. If you’re operating on a thin profit margin, a lease is worth considering. Be aware that if you are planning on purchasing the equipment at the end of the term, you’ll likely have to pay all or some of the cost of the equipment. This arrangement will probably be more expensive in the long run.
- Cash-on-hand If a company can’t part with 10% to 20% of the equipment’s value up front, it might have difficulty finding a lender willing to dance. In this case, a lease might be the only alternative.
Although equipment makers and suppliers must be aware of these considerations, it’s companies looking to secure equipment that need to put them front and center. Equipment suppliers have another choice to grapple with. Namely, should the manufacturer partner with a technology vendor to provide in-house financing, or engage a bank or equipment-purchase lender to provide the financing for your customers?
Learn about TurnKey Lender Equipment Financing Platform.
Advanced AI in an equipment-financing platform you control
While the question may differ from supplier to supplier depending on the industry served, points in favor of third-party lenders include:
- Removes credit risk for the manufacturer
- Requires less training for employees
- Results in the equipment maker receiving full payment up front
Among arguments in favor of equipment suppliers using in-house equipment-financing technology like TurnKey Lender’s to issue financing on their own are:
- Affordability from the financing platform’s modular structure allows manufacturers to start small and add functionality as needed. It’s anything but one-size-fits-all.
- Flexible underwriting lets you make credit decisions, and control risks, on your own terms. You can also waive down payments — with such decisions backed by verifiable data.
- Better portfolio yield from artificial intelligence that lets manufacturers optimize portfolio yield by approving only the customers you want, at optimal risk-adjusted rates.
- Enhanced customer loyalty from white-label technology so you don’t have to worry about clients getting confused by third-party documentation.
- Client-data integrity and security ensures customer data isn’t shared with third parties.
- Business metrics that can help you understand customer behavior and preferences, and design incentive programs accordingly.
- Staff training and 24/7 IT support and customer service Do you have a question? It gets answered in real-time.
- Mobile-lending capabilities by means of encrypted apps designed for secure, on-the-spot service.
- Scalability that lets a financing program grow as the business grows.
- You keep 100% of the fees No fuss, no muss, and absolutely no split with a bank.
“The fact that our platform uses advanced AI to support credit decisions, set rates and control risks means our clients have more scope to provide financing for larger financing contracts,” says TurnKey Lender’s Ionenko. “Third-party lenders can cost their clients by rejecting applications that look riskier than they really are — subtleties that third-party generalist lenders may overlook.”