Similar to the construction industry, the demolition industry runs on tight margins. In order for demolition companies to stay competitive, successful and profitable, these firms must constantly anticipate change and find ways to manage and improve finances.
While several factors affect financing in the demolition industry, a key component that is currently impacts this market is how debt is affecting a company’s bonding.
Bonds play a critical role in a project’s financing. By increasing bonding, demolition companies can increase their potential for higher profits. To do that, however, demolition companies often need to re-assess their finances, and a good place to start is re-examining how their equipment is financed.
HOW BONDING IS CHANGING
Between the years of 2000 and 2004, surety bond underwriters continuously lost money due to a combination of economic downfall and a sharp rise in demolition and construction failures. One result of these events was a severe consolidation in the surety bond market.
With surety bonds in place, the risks of project completion are shifted from the owner to the surety company. Facing increasing financial pressure, bond providers began looking at companies and bond requests with a much more narrow definition of “acceptable risk.”
Today, surety losses are diminishing, and there are signs of a turnaround. The overall direct loss rate (the total amount that sureties had to pay out in losses as a percentage of the premiums they collected) has been steadily declining over the past several years. If this trend continues, contractors will likely see these strict requirements lifted, and surety companies may offer more flexible terms than in previous years.
When a company increases its bonding, this means larger, more expensive projects can be awarded to that business. Demolition companies without bonding are likely to lose projects to competitors with the necessary bonding in place.
Alternatively, when bonding becomes highly accessible to multiple companies, having this in place provides less of a competitive edge than it presently does. For that reason, a well-run business that is able to obtain suitable bonding right now should use this to their advantage.
First and foremost, bond underwriters look at debt. That is where strategic equipment financing comes in.
A major debt generator for demolition companies is capital investments in equipment. For this reason, companies in the demolition industry seeking to expand their bonding should research their equipment finance options carefully in order to focus on saving cash, as well as keeping debt off of their books.
Summit Funding Group works with many demolition companies to help them finance demolition equipment while also keeping debt low. Maximizing company cash on hand is key to increasing bonding capacity, and financing demolition equipment in the most resourceful way can be a key component to making that happen.
Demolition equipment purchasers are constantly searching for solutions to obtain new, advanced equipment and stay competitive in their market.
To assist in this pursuit, the following are three ways that demolition companies can increase their bonding through strategic equipment financing:
1. Ensure that equipment is up to date. An increasing expectation is for demolition companies to continuously operate and add the newest and most innovative equipment to its fleet.
Obsolete equipment can cost a company both contracts and money, and can hurt its chances of being awarded higher bonding. When outdated equipment appears on balance sheets, bond underwriters view this as damage due to the extra expense it takes to maintain this equipment, as well as the fact that it isn’t contributing to a company’s incoming profits.
Keeping updated demolition equipment in a fleet is that continued capital investments in new and upgraded equipment will deplete a company’s cash reserves or increase its debt.
As a solution, many companies in the demolition industry are now looking to specific types of equipment leasing in order to spread out the cost of equipment over time and keep depreciating assets off their books.
By leasing equipment instead of purchasing it, companies can save their cash and instead plan for a steady monthly payment. In addition, they can have the option to walk away from the equipment at the end of the lease, leaving them open to lease newer, more upgraded equipment to keep their business competitive and attractive to bond issuers.
2. Balance equipment fleet. Demolition companies have many options to consider when it comes to financing their equipment fleet. A major key to success is ensuring a strong balance of owned equipment versus leased or rented equipment.
Establishing a balanced fleet can be an extremely important factor in increasing a company’s bonding.
Many companies in the demolition industry are now looking to specific types of equipment leasing in order to spread out the cost of equipment over time and keep depreciating assets off their books.
Many companies think of renting or rental purchase options (RPOS) as a strong solution to save cash up front while still accessing the latest equipment. The problem is that renting equipment is extremely expensive, and RPOs are typically extremely high interest agreements.
Alternatively, many demolition companies in today’s market are looking to long-term leasing solutions, which enable them to pay less, and to spread out their payments over time.
For example, Summit Funding Group recently worked with a large demolition company in the U.S., which had built an expansive fleet of equipment with RPOs. The company wanted to update its equipment, but was stuck in rental agreements with very high monthly payments. The Summit Funding Group team was able to convert the demolition company’s existing RPOs to short-term leases, and ultimately cut the monthly payment in half.
3. Examine different leasing options. The leasing structure that is right for a demolition company depends entirely on its existing finances and operations, as well as the type of equipment being financed.
Equipment such as conveyer belts and cranes have long lifespans. As a result, a capital lease is generally best for this type of equipment.
Capital leases function like a purchase. These leases offer low rates and low monthly payments, however the equipment is bought by the borrower after the lease term is complete.
Using this structure, a demolition company can keep cash on hand by stretching the cost of the equipment they need out over several years, rather than paying the entire purchase amount up front, but they still have the opportunity to own the equipment for its long operational life.
Alternatively, demolition equipment that has a shorter lifespan due to operational wear and tear, should be financed with operating leases.
Operating leases allow companies to use equipment with no obligation to own it and merely pay for usage. This strategy allows demolition companies to constantly upgrade their equipment without having to account for outdated equipment on their books. In addition, when an operating lease ends, the company will still have the option to purchase the equipment at fair market value.
Operating leases are especially beneficial to the demolition industry where a large amount of critical use equipment is heavily used in rough settings, resulting in a quicker depreciation and therefore stronger demand for refreshed equipment. For this reason, companies seeking to increase bonding will benefit from operating leases.
MAKING THE RIGHT DECISION
By reconfiguring how demolition equipment is financed, demolition companies will be in a better position to take advantage of increasing bonding that will become available in 2016 and beyond.
The demolition industry is competitive, and financing or refinancing equipment as a means to secure higher bonding will continue to be a priority.
As this trend increases, working with finance experts that specialize in the demolition industry will become more important than ever.