Buy Now or Wait? – Financing Equipment Amid High Prices and Rates

Bryan Furnace (00:00):

Hi everyone. Welcome back to Equipment World. You're watching The Dirt. I'm your host Bryan, and today we're going to talk about financing equipment. Yeah, everyone knows how to finance equipment at a surface level, but we're coming into a recession and I think everyone's a little nervous on the whole finance game. Well, here to talk with me today is Gary from Crest Capital and he's going to walk us through some of the tactics and techniques you can use to get the most out of your finance deal. How can you leverage that in a way that would be most impactful to your business? So without further ado, I'm turning this interview over to Gary.

(00:40):

So my first question is, after such a long extended stretch of having low interest rates, how is the Fed's decision to raise interest rates going to impact contractors, and how should they respond on their end?

Gary Evonsion (00:52):

What we're seeing in the market is the Fed's raising interest rates are going to affect construction projects, dirt projects in a couple ways. Material costs go up, interest rates on those projects go up, so it's going to put a damper on some of that. That's the bad side of it. The good side of it, I guess, is infrastructure projects are still going on and they're not as affected by interest rates. So I guess in short, how a contractor should be proactive in making sure they've got their house in order in terms of going after different projects, maybe diversifying, maybe thinking about getting equipment sooner than later before cost of equipment continue go up and before rates if they're financing it go up.

Bryan Furnace (01:32):

So that kind of ties into my next question here, which is with material price increases and that resulting in higher equipment purchase costs, what has kind of been the response of contractors? What have you guys been seeing?

Gary Evonsion (01:44):

It's really interesting. It's been something that's been happening over the past, say, year, year and a half. And it's been, when we saw this happening, we didn't realize it until looking back now, but there was a period of time where cost and things were going up and people were hesitant to buy because they felt, hey, the prices are going to come down again, whether that's materials, whether it's equipment, whatever. And we saw a break probably about maybe six months ago where all of a sudden people realized, Bryan, prices aren't coming down anytime soon.

(02:22):

And so where they were, "Hey, we'll wait until price's equipment come down," they finally realized they're not coming down, "I better make a move." Now, where that affected them negatively is they were waiting, it put them behind the queue of getting equipment, it put them behind a queue of prices increasing. So that's kind of a trend we had seen over the past year or two, maybe even a year and a half, that people just hesitated, "Hey, it's coming down," and then finally realizing it's not coming down. "Maybe I need to make the move now."

Bryan Furnace (02:57):

It is interesting you say that. Through my contacts in the dirt industry, I've known there's a lot of people in that boat, that they waited too long, increases happened. They also waited too long while they were humming and hawing about everything. And now you've got a 18 month lead time on a skid steer. But it's been interesting, there were a very, very select number of guys who had just at the last minute ordered their equipment. It was on about a six month lead. And so by the time the new equipment came in, that was about the time the used market went up. So they actually made money selling their used machine, and then turned around and were able to get into a machine in a reasonable amount of time, and actually before the price increases got crazy high. So there's been some interesting dynamics that have played out in this market.

Gary Evonsion (03:39):

Now, that is very true. Something you mentioned just then, maybe something to highlight, we do finance equipment, both new and used, and we also can finance people who are private party sellers. So like in that situation you just mentioned, let's say they bought equipment and it wasn't finance, it was just bought. They just bought it, and then they decided, used it a while and said, "Okay, I'm going to sell it." We can finance their sale to another party. So we call that private party financing. So just something to keep in mind for people viewing the video that we can be helpful in that way.

Bryan Furnace (04:13):

Yeah, absolutely. I think a lot of guys don't realize that there's more than just the local credit union when it comes to finance options for private sale.

Gary Evonsion (04:21):

Yeah.

Bryan Furnace (04:21):

So that's really good information.

(05:53):

What is Section 179 and how does it impact contractors as they go to purchase a piece of equipment?

Gary Evonsion (05:59):

Section 179 is part of the federal tax code where, think of it this way, someone buys capital equipment, they normally depreciate it over five, seven, x years. Instead of doing that, if you're a small medium size business, you can take the depreciation immediately. Why that's really a nice benefit for contractors out there is if, one, they're profitable and, two, they can get the equipment delivered and operational by the end of that tax year, they can write that off their bottom line, which basically accelerates that depreciation. So instead of getting the benefit over five years, they get the immediate benefit, which is a larger benefit.

(06:36):

And if you think about it, putting our financing hat on, if they finance that purchase, say right now, or in the next month, they might make three, maybe four payments to their financing company this year. But the write off of that equipment might actually save them more cash that they wouldn't have to send out to the government and actually goes can go towards those payments. And while they have the equipment, they're using it, so they're generating income off the equipment and they're using the tax laws to help kind of pay for that equipment. So it's kind of an exciting thing to be done and we see it done all the time for smart, savvy business people.

Bryan Furnace (07:17):

And just to kind of break it down and make sure I understand it correctly, I could see an example of using this. We've had this really big fat economy that everyone is also growing fat off of. So someone's had a really tremendous year this year and they're going to have to pay a lot in taxes. But at the same time, we're also heading into a recession. No one's really sure how profitable they're going to be next year. Instead of taking my depreciation and writing it off over the next couple years with this big unknown of how much money I'm going to make, I could take that full depreciation this year and use it against my tax liability for this year, and that way I'm safe and I know I'm covered.

Gary Evonsion (07:52):

Yep. Yep. Basically.

Bryan Furnace (07:54):

Perfect. Okay. So that is a very valuable tool for business owners that know how to use it.

Gary Evonsion (07:59):

Yep. Because you know made a really nice point. They have kind of certainty of where they stand today. Well, let's say as they get in towards the end of the year, but they'll know, "Hey, I'm profitable." And so it's a great certainty that, "Hey, I can use the tax write off."

Bryan Furnace (08:15):

And you're getting the full benefit. Right?

Gary Evonsion (08:18):

Yep.

Bryan Furnace (08:18):

Gotcha.

(08:19):

My final question to you is, are there any other kind of best practices you would recommend for contractors looking to purchase a piece of equipment? Section 179 is a perfect example of something that if I'm not aware of it, I may never take advantage of it. Anything else that kind of sticks out to you along those lines?

Gary Evonsion (08:35):

Yeah. I would say that first thing is, and this'll sound pretty basic, but determine if you need that equipment, and if you need it for the long term, it's get it. But move quickly to lock in the price of the equipment because, as we've all seen, equipment keeps continuing to go up, and so lock in the price of the equipment. We like to think it's very good for businesses and business owners at this stage in the economy to keep a lot of dry powder, which means keep financial flexibility, which means use that asset to get capital in, and that means that's by financing it. That financial flexibility going into what we may be going into over the next couple years is going to be critical for all business owners. And then once they decide to do that, move quickly on the financing side too, to make sure they can get the terms they want. That type of thing.

(09:28):

Sometimes we hear from people, "Oh, I should have done this six months ago. I should have done it three months ago." Sure, that's great, but you still haven't lost out because in the next month, three months, six months, rates most likely are going to continue to go up. So don't look back, look forward. And if you do both of those things, the equipment locking in a lower price than it could happen and locking in integers rate now versus it going up, both those will give them a competitive advantage of people who, Bryan, put their head in the sand and don't do anything.

Bryan Furnace (10:06):

Yeah. Yeah.

Gary Evonsion (10:08):

The final thing... Well, actually two things because Section 179 was going to be the final thing. So yep, that's critical to take that. And a lot of people say, "Hey, I know about that," like you did. "Hey, I know about it. I didn't know it was called Section 179," but know about it, take advantage of it.

(10:27):

And then the final thing is have a good discussion with the vendor who's selling you the equipment and make sure they are on the same page with you of expectations for delivery. Now, no one can guarantee anything, but it's good to know, and we see this where an end user, a contractor says they just didn't lock in or didn't understand when delivery was going to happen. And find out, is it eight weeks? Is it six weeks? Is it six months? Is it eight months? Is it, like you mentioned, 18 months? But understand that because that's a critical piece that you want to kind of nail down, and you may have to look around to find someone who can deliver it in the time that you want it. So I'd say those are best practices.

Bryan Furnace (11:12):

Yeah, I was going to say that sounds like, especially in the equipment market that we're in, for you to really do an adequate job at cash flow management, you do really need to lock in realistically, are we three months out, or are we six months out, or are we 10 months out?

Gary Evonsion (11:26):

Exactly.

Bryan Furnace (11:27):

Well, Gary, thank you so much for all the information. This has been great.

Gary Evonsion (11:29):

Thank you, Bryan. Thank you for having me.

Bryan Furnace (11:31):

Well, thank you again to Gary coming on the show to give us a little knowledge and wisdom on how to go about financing a piece of equipment that isn't just going to be a giant brick of debt. It's something that will actually help your company and help you from a cash flow management standpoint. So as always, I hope this has been helpful. We appreciate you guys watching. We'll catch you on the next episode of The Dirt.