Corporate finance vs. equipment finance are generally two different "animals" each suited to entirely different purposes. Many firms historically opted to use their corporate finance facilities to budget and fund equipment acquisition. In the past, with freely available capital, this strategy did not have the negative budget impact that it does today, in the challenging economic environment. Many firms have discovered that their bank operating lines of credit and corporate financing facilities have been compressed, reduced or curtailed due to a range of factors including operating performance or covenant breach. In some cases, banks that participated in corporate revolvers have have had to curtail or reduce their own portfolio exposure level or withdraw from certain customers ( concentration limits) or pull out of certain industries entirely.
In the 2010 budget planning process financial decision makers might well consider the utility of equipment and technology financing lines of credit, set apart from corporate finance facilities, as an asset allocation tool. For many customers equipment financing can be cost effective with pricing at or near the equivalent corporate incremental borrowing rate. There are several reasons why, in 2010, an equipment financing line may be preferable to funding capital equipment via cash or corporate financing.
Consider that equipment financing & technology leasing facilities;
1) may provide a new funding facility that augments corporate financing
2) may offer more financing without down payments or entanglements such as restrictive loan covenants and loan "call" thresholds
3) may be a lower cost alternative compared to corporate financing which often requires compensating balances and annual fees
4) offers fixed-rate vs. floating rates which are expected to rise. Fixed-rate financing can act as an inflation hedge in a rising rate environment
5) Provides fixed-rate, firm-term financing, up to 84 months or longer, which allows capital equipment costs to be matched and aligned ( as a monthly expense ) to the useful life of the equipment and to the timing of budgets, revenues, cash flow and cost saving economics of the equipment or technology being acquired.
In summary 2010 may be the right time to incorporate an equipment finance or technology leasing facility into your overall Capital Equipment budget strategy. Equipment financing can offer a wide range of structures and benefits including Capital Leases, Managed Services Agreements and Operating leases or hybrid financing structures that allow "off balance sheet" treatment with less affect on financial performance ratios and balance sheet metrics. Equipment Financing can be a cost efficient tool to help take some of the pressure off Corporate Financing restrictions and covenants. At the same time equipment financing may be a better transaction structure for depreciating assets with a multi-year useful life.
