As aging equipment requires replacement, determine what financial options will work best for capital investment.

by Therese Dunphy, Editor-in-Chief

Since the construction market collapsed in 2008, operators have shown unprecedented levels of cost consciousness, and rightly so. In an industry where the profit per ton often can be calculated to the right of the decimal place, every penny truly does count.

To keep costs down, many operators have extended the life of the iron in their plants, and it made sense. As production requirements dropped, equipment usage also fell. When replacement equipment was needed throughout 2010, nearly three in four operators chose to buy used equipment rather than new. But high-quality used equipment is becoming scarce, and existing iron continues to age. Eventually, new equipment will be purchased, and operators should understand how to get the biggest bang for their buck.

When is the right time?

Consumer confidence aside, there are a number of objective parameters that influence equipment procurement decisions. Each of these can drive an operator’s decision on when to make capital investments.

One consideration is the relationship between maintenance costs, replacement costs, and production requirements. Each type of equipment has a natural maintenance cost curve based on site-specific factors such as the operating environment, mineralogy, and preventive maintenance. Experienced operators develop metrics that indicate how many hours of use or tons produced a piece of equipment typically logs before maintenance costs begin to climb and equipment reliability begins to drop. As that metric nears, many opt to replace equipment rather than risk unplanned downtime.

Another factor is the operator’s balance sheet. Before purchasing new equipment, an operator should evaluate if he has enough product demand to cover current equipment costs and if cash flow is sufficient to invest in new equipment. Caterpillar Financial Services, in conjunction with various dealers, has offered seminars to help its customers understand their financial position, tax considerations, and cost/benefit analysis of repairing versus replacing equipment. In today’s business environment, some financing groups want strong ties with their customers.

“Our focus with customers is that we want to have a relationship with them,” says Mike Rankin, U.S. vice president of CE Financial Services, the captive finance arm of Volvo Construction Equipment. “In the finance business, equipment funding is a little bit volatile. It’s good that your lender knows you and you know them so that when things get a little tough, if you need some help, you can communicate effectively.”

Who is the right partner?

The shrinking number of players in the financing market has created a challenge for some operators, and today’s lending standards may pose stricter requirements than those of a few years ago.

Units Financed

ELT Magazine, a publication serving the equipment financing market, reports that new business volume fell from $116 billion in 2008 to $81.1 billion in 2009. At the same time, lenders faced a 40-percent increase in delinquent accounts (90+ days) and a 129-percent increase in charge-offs. However, the equipment financing market began to turn the corner in 2010 with a 23-percent increase in new business, while late pays and charge-offs declined by approximately 40 percent.

“Lenders are becoming more confident in qualifying people for low-cost financing,” says Tim O’Brien, marketing manager for Case Construction Equipment. “We think the big majority of new machines will be financed.”

“There’s a lot more positive out there right now than there was a year ago,” Rankin adds. “I can see a huge difference out there.”

2010 Units Financed

While the lending market is improving, it is not without its casualties and consolidations. Case and New Holland merged to form CNH Capital America, and Wells Fargo acquired CIT group. Some private banks exited the equipment financing field. But while there are fewer players in the market, financing opportunities do exist.