Equipment Financing in an Uncertain Time

SHANE SHIDAKER

Construction Relationship Officer
1st Source Bank

Financial Services
& Contractors

SHANE SHIDAKER

Construction Relationship Officer
1st Source Bank

Financial Services
& Contractors

Equipment Financing in an Uncertain Time

By Shane Shidaker

t’s the question that every contractor asks themselves when acquiring equipment: Is it better to rent or buy?

The construction industry was thrown a curveball with the COVID-19 pandemic at the end of the first quarter of 2020. As a result, there was a considerable amount of economic uncertainty in the second and third quarters of 2020, which led to some lenders taking a more conservative underwriting approach. Many contractors also chose to be cautious, as they elected to rent equipment instead of financing, even with historically low interest rates.

What to Expect in 2021

With the construction industry deemed essential and lenders having capital available for funding at attractive interest rates it would seem contractors would be lining up for equipment financing. However, there are some things to consider before adding new equipment debt in 2021. Some uncertainty persists about the overall direction of the economy, as many sectors still feel the effects of COVID-19 that have caused delays or cancellations of construction projects.

This will cause some trepidation for both borrowers and lenders when it comes to equipment financing, as it remains to be seen how the construction industry will be affected long-term by the COVID-19 pandemic. The construction industry outlook from a glass-half-full perspective points out that the pandemic has caused a backlog of new construction projects. This is most prominent in the residential housing sector, as demand for housing has exceeded supply. Consumers are choosing to buy over rent to take advantage of low mortgage interest rates. There are also long-overdue infrastructure repairs and improvements to highways and bridges that will need to be addressed in the near future.

The most recent COVID-19 stimulus bill, passed in December, contains almost $170 million of additional funding for federal highways. Another $1.9 trillion COVID stimulus bill on the table—which appears to have some hope of passing—also includes a significant amount of money for highways and airports.

The biggest unknown facing the construction industry in 2021 continues to be COVID-19 and the ability to get a large percentage of the population vaccinated to avoid potential shutdowns. It would be a big boost to the state of Alaska if a vaccine is readily available before the construction and tourism seasons.

Is it Better to Buy or Rent Right Now?

Contractors need to take many factors into consideration when deciding how best to manage their equipment fleet. One of the biggest factors in deciding whether to purchase or rent equipment is examining the overall value the asset will bring and the long-term direction of the company. If a contractor needs a piece of equipment for a specific job and there won’t be a use for it going forward, renting in most cases will be the more attractive option.

This is not always the case however, as purchasing equipment that holds its value well could be a cheaper alternative to renting, with the ability to sell the asset after a couple years of use. Equipment that generates revenue across many applications will always be more economical to purchase. There is no exact science when deciding whether to purchase or rent equipment, but it is important for contractors to consider the position their company is in today as well as where they see their company in five or even ten years into the future.

Helpful Tips When Seeking Financing

Choosing a lender that knows your business

There are many options when picking a financial lending source, but it is valuable to choose one that is well versed in the construction industry. Commercial lenders should visit contractors’ operations and larger jobsites to understand the type of work that is being completed. This allows the lender to better tailor a loan structure that works best for each individual contractor.

Financial reporting

When seeking financing it is important to have updated financial statements available. Lenders use these statements to determine a contractor’s financial wherewithal and ultimately their creditworthiness. In order to increase exposure with a lender it is beneficial to improve the quality of the financial statement provided. Ranking of financial statement quality is as follows: company prepared, tax return, complied, reviewed, and audited. It is also important to prepare in-house interim statements throughout the year as it will be helpful for contractors and lenders to examine year-over-year trend lines.

Shane Shidaker, CLFP is a Construction Relationship Officer for 1st Source Bank covering the Northwestern United States and Alaska. In business since 1863, 1st Source Bank has more than 40 years of experience as a leading financer for construction equipment. The bank’s equipment financing division ranks #37 on the Monitor Top 100 List and has received a 5 star “Superior” rating from Bauer Financial. 1st Source offers a wide variety of financing options for contractors including new and used equipment purchases, rental conversions, refinancing, loan consolidation, construction equipment based working capital loans, tax advantageous leases and lines of credit.

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