Financing Strategies Deliver Cost Savings and Peak Flexibility to Growing Utility Construction Firms
The U.S. utilities industry is experiencing record-breaking growth, driven largely by the ongoing need for infrastructure upgrades and restoration, as well as significant, government-mandated projects such as grid modernization and extensive pipeline overhauls.
In fact, the utilities industry saw a record-breaking approximately $117 billion in spending by the largest investor-owned utilities in the U.S. last year. This has translated directly into a larger volume of projects and growth for utility contractors. While this industry has continuously faced uncertainty due to shifting energy sources and heavy regulation due to environmental impact, it is clearly not slowing down.
Because utility construction is thriving and there are major projects on the horizon, many contractors are finding themselves considering the best approaches to acquiring new equipment.
Financing equipment, as opposed to buying outright or renting, is increasingly emerging as the most cost-effective and efficient strategy. By selecting the right financing solutions, utility construction companies can:
Accommodate Cost-Effective Growth
As utility construction firms grow, costs will inevitably rise. One way to manage those costs and protect the company from future risk is to arrange for financing that protects initial capital, and allows for steady, manageable payments.
That said, there are many lease structures and options available, so it is important that contractors examine them carefully to fully reap the rewards and potential cost savings.
For example, the two main types of leases utilized for equipment are capital leases and operating leases.
Some commonly-used pieces of utility construction equipment, such as cranes, are an example of assets with long usable lives, for which a capital lease make sense. This structure acts essentially as a purchase, but allows for the cost to be spread out over time on one fixed monthly payment, preserving cash for other costs - which is especially useful in times of expansion.
For equipment with shorter lifespans or those that are upgraded frequently due to changes in technology, an operating lease can be the smarter choice. These offer even lower, predictable monthly payments, and allow contractors to hand back the equipment at the end of the term (and acquire the latest and greatest), or make the choice to purchase if they desire.
By arranging the right lease structure, utility construction company owners and managers can then focus on other aspects of growth - such as hiring skilled employees and earning and negotiating highly profitable contracts.
Make Upgrading Equipment Easier
One of the biggest perks of financing is the ability to easily upgrade to the latest advancements in technology. Up-to-date equipment is essential to staying competitive and winning more jobs. Further, efficient equipment can result in lower operations costs, saving money in the long run.
Utility construction companies that finance their equipment on an operating lease will benefit from the ability to upgrade every 3-5 years without excess costs.
In addition, manufacturers of technologically-advanced utility construction equipment can benefit from offering finance options to their users.
For instance, we recently partnered with a company that has developed several hybrid, energy-efficient, and environmentally-friendly bucket truck and digger derrick options. Their hybrid bucket trucks, while more expensive than traditional models by approximately $70,000, offer many added benefits - including fuel savings - which can add up significantly over time. By partnering with our firm, the company is able to offer leases on these highly efficient trucks, enabling their customers to keep their equipment fleets fresh while saving costs on fuel, as well as reducing downtime and maintenance costs.
Increase Flexibility and Fleet Diversification
Today's construction companies recognize that, regardless of the healthy state of the industry, flexibility must always be a component of their equipment acquisition strategy. This generally means a portion owned, a portion leased on terms ranging from 3-10 years, and a portion rented.
The use of short-term rental equipment by utility contractors has remained strong as project volume increases. That said, as more professionals have become confident in acquiring assets based on rising demand, it is beginning to make more sense for a larger portion of their equipment collection to be financed on operating leases.
Because the industry is more steady and predictable, the lulls between jobs will be less frequent, and to pay such high premiums on short-term rentals is no longer necessary to adapt to workflow in most cases. Equipment can be financed on an operating lease for terms as short as just a few years, while offering much lower payments per month than equipment rented on shorter terms.
This is not to say that short-term rentals won't always play a role to some degree in a utility contractor's equipment strategy. For example, construction firms based in certain areas heavily affected by recent natural disasters may experience a temporary spike in business that requires rental equipment - however, they might also consider operating leases for some of these additions based on projected future growth.
Most utility contractors will soon be heading into the new year with confidence, as the industry continues to thrive and job demand rises. When evaluating their equipment acquisition strategies, it will be important for professionals to consider how different financing and leasing structures can benefit them in terms of costs and convenience, and help them build and position their equipment fleet for years and decades to come.