Robert Macklin, Chief Financial Officer at Powerstar, discusses the benefits of acquiring capital equipment ‘as a service’, a flexible funding option that allows businesses to utilise equipment essential to core operations without investing a significant portion of the business’ capex.
The full article was published by Robert on LinkedIn on Tuesday 30th January 2018.
Capital Equipment as a Service: pay for value, not equipment
Capital equipment is essential to the success of many businesses and integral to how they operate on a daily basis. However, for some businesses the very nature of acquiring that essential capital equipment can present problems, with it typically being expensive to acquire, require technical expertise to operate, and incur additional running and maintenance costs. Beyond that, the equipment could also require repairing, upgrading and investment into spare parts.
All of this requires a sizeable chunk of a business’ capex to be set aside to acquire capital equipment, which could take investment away from other essential business operations.
However, consumers of capital equipment have recently become focused on financing the purchase of the equipment or more importantly financing how they benefit from the use of capital equipment and reduce its total lifespan cost. This has led to the evolution of how businesses acquire capital equipment, and in turn how OEMs supply it, which continues to transition into a serviced business model, with the equipment being supplied ‘as a service’. This allows businesses to utilise the equipment whilst spreading the cost without a huge impact on their cash flow, meaning financial capital can instead be invested into other business operations essential to the company’s success.
What does ‘as a service’ mean?
Capital equipment as a serviceAcquiring capital equipment as a service means that, instead of a business buying equipment outright and then being fully responsible for it thereafter, the OEM evaluates their customer’s needs and then provides the solution to those needs by being responsible for the equipment, as well as its performance, upkeep, maintenance and servicing, for the duration of the agreement.
The degree to which the OEM is responsible for the equipment can vary depending on the provider and customer’s needs, but in a fully serviced model the OEM is responsible for the financing, operation, performance monitoring, maintenance, repair, and even the replacement of the equipment.
What are the benefits?
Acquiring capital equipment as a service helps reduce the risks involved with buying the equipment outright, such as one large, lump sum payment and the ongoing repair or servicing costs, allowing businesses to spread the cost and focus on core business operations and their own customers’ needs.
In addition, capital equipment as a service allows businesses to avoid barriers to accessing the equipment as upfront costs are reduced, and can be more flexible as they can scale up or down as required, which means the agreement can easily respond to accommodate company growth without the need to raise further capital to deploy additional equipment.
For larger businesses, cash flow may not be an issue when purchasing capital equipment, so the prospect of avoiding interest and finance charges by buying outright can be an attractive option. However, cash is a valuable resource and there are most likely other ways for businesses to use their cash that yields better return on investment than purchasing capital equipment. For example, having ready access to its cash flow can enable a business to grasp commercial opportunities or to invest into R&D to give it competitive advantage in its marketplace. Or, if nothing else, provide a healthy cash reserve as an economic safety net during times of uncertainty.
Another concern when fully servicing capital equipment purchases may revolve around the perceived complexity of finance agreements. However, modern finance contracts are designed to be as flexible and straightforward as possible, and can be tailored to meet the specific requirements of individual businesses and their operations in order to offer affordable payment options that grow and adapt along with the business.
Invest in your customers, not your equipment.
In order to remain competitive and profitable, most OEMs are now changing how they operate to meet the demands of capital equipment consumers. The decision to reserve capital for investments that benefit the company and its business strategy more directly is a decision more and more organisations are seeing the value of.
Acquiring capital equipment as a service means a business pays only for the value that equipment brings to the organisation so that the purchase aligns to its operations without negatively effecting its profitability. What’s more, this method of purchasing brings a personal, bespoke element to the process that the modern-day consumer has come to expect, meaning the business and its operations feel valued and safeguarded by the OEM in every stage of the purchase, from initial enquiry through to ongoing servicing and maintenance.
Finally, the method of fully servicing the acquisition of capital equipment enables the consumer to invest purely in their business rather than the equipment, removing the risk of obsolescence whilst also providing security through a flexible and affordable payment structure that helps keep the business cash positive from the outset.
The benefits of utilising the as a service model depend on the unique requirements of your business, that’s why businesses interested in using this method should seek a provider who can offer a bespoke solution with flexibility to meet their needs.