Equipment financing trend toward flexible usage and service-based models

Insights from 2018 AED Summit

By Theodore Rennenberg Jan 24, 2018
Blog

Today’s manufacturers and dealers are consistently faced with growing Customer demands to increase operational efficiencies, and the need for equipment to be "always on" while keeping overall Total Cost of Operation (TCO) at a minimum. Enhanced collaboration between manufacturers, dealers, distributors, resellers, and leasing companies is leading to usage-based and managed services business models to meet these demands. Ultimately, these models are unlocking exciting new revenue opportunities and partnerships for everyone involved.

Last week, I had the pleasure of giving a seminar at the 2018 AED Summit on behalf of DLL, entitled "Equipment financing trends: Usage and service based models," to share how the newest trends in equipment financing can help dealers and manufacturers maximize their investment in equipment with usage-based models and in turn provide better customer experiences to their end users. If you were not able to attend the Summit, below are some of the overall insights covered, and I’d be happy to discuss your perspective!

Trends towards growth

In 2017, Technavio reported that the global construction equipment market is forecasted to consistently grow by almost 7% over the next three years. The North American market, has seen a remarkable turnaround since the 2009 economic crisis. ELFA named ‘construction’ the hottest equipment sector for the 4th year in a row, pinned to the improving health of the economy and low interest rates. However, with this growth, customers are evolving and expecting more services and flexibility. There is a growing need to offer usage-based options (operating leases) and services like 3rd party asset managers. It is the era of the "uberization" of business models driving the need for usage/performance-based products.

How to add value in your business model

Manufacturers and dealers need to focus on how they can match the marketplace evolution and demand—and this starts with innovative financing. Positioning your business to understand the equipment application, usage and most importantly the various finance options available will allow you to advise Customers early in the sales process, when it is most important. By helping Customers decide which options best suit their long-term goals you will help them derive the most value from equipment through properly structured lease and maintenance agreements. This results in maximum uptime, and if applicable, frees up your Customers’ working capital, while selling more equipment with a small down payment. This will quickly make a big impact with your Customer and solidify your value proposition to them.

Remember, financing options should be introduced early in discussions to properly ascertain a Customer’s usage patterns, which will in turn help them decide whether to lease or to own. Secondly, bundled offerings such as a lease with included maintenance services are a value add for Customers. Service and parts agreements will guarantee the right service is done at the right time which will lower overall maintenance costs, the Total Cost of Operation, and increase the reliability of the equipment. As more people look to leasing as an effective fleet management tool, they realize that existing fixed term leases have a weakness—the fixed term. Alternatively, flexible usage-based contracts are just that, the term is flexible based on the equipment usage.

Who benefits from flexible term leases?

By adding this ‘term flexibility,’ Customers benefit from equipment being replaced at the right time, based on its’ hours, not when the fixed lease term ends. So along with the standard benefits of leasing that includes offering lower monthly payments, usage based (flexible term) leases eliminate overtime, drastically reduce overpayment, and eliminate equipment rotation issues. Flexible usage-based contracts with bundled maintenance are like Fleet Management in a box, making all parties to the transaction nimble and able to offer the best service and performance that equipment has to offer. Additionally, the usage cost and monthly payment is low when equipment is underutilized and increases when overutilized which helps Customers more accurately report expenses in line with increasing revenue.

Innovating with Lease by the Hour

To meet the growing demand for usage based leasing, we developed Lease by the Hour®, an innovative financing solution that provides more flexible usage-based programs for our partners and their Customers. This program solves the common discrepancy between estimating hours and actual usage. Did you know that approximately 90% of the time our Customers are incorrect in estimating hours and usage? That is not good, but understandable as there are many contributing factors, such as:

  • end users often confusing available hours with actual usage
  • overestimating usage to avoid overtime charges at the end of the lease term
  • accurate usage data needed to structure the lease is typically not available
  • actual usage of equipment changing after the beginning of a lease
  • leasing companies not getting usage data during the life of a lease to gauge the health of the lease

One way to eliminate this problem is through a usage-based program like Lease by the Hour®. Watch this short video to see how it works:

 

Offering a Lease by the Hour® option includes the following benefits to Customers:

  • no overtime costs
  • when bundled with maintenance, it assures maximum uptime as service intervals increase when usage is high
  • monthly payments are lower when usage is down, and increase when usage is high, which shortens the contract
  • usage determines the lease term which in turn will match the equipment lifecycle
  • No need to rotate equipment
  • make more informed decisions
  • customers and dealers have more "in-term" control over assets

Lease by the Hour® is appropriate for your next lease if you answer ‘yes’ to two or more of the following questions:

  • Do you understand normal fixed term Fair Market Value (FBV) usage-based leasing?
  • Have you experienced fluctuating usage on equipment in the past or foresee this in the future?
  • Have you faced overtime in normal fixed term leases in the past or calculated overpayments on underutilized equipment?
  • Have you needed to rotate equipment due unpredictable usage?
  • Have you needed to park equipment due to over usage during a lease term
  • Have you avoided using leasing in the past due to the inability to predict/structure an FMV contract?

Key takeaways for 2018

It is very promising to see that equipment sales are rising and forecasted to grow consistently over the next several years. However, as Customers require more innovative, flexible, and usage-based financial solutions from equipment dealers and manufacturers; everyone will benefit by evolving to meet this demand. Customers benefit through increased reliability, uptime, matching contract term with lifecycle of equipment, matching expenses with revenues, eliminating overtime, eliminating the need to rotate equipment, and decreasing the age-old habit of overestimating usage. Dealers and Manufacturers not only benefit in helping their Customers with all the above listed lease enhancements and becoming a "Solutions Provider," but they also increase equipment sales, parts/service revenue, and enhance their equipment’s reputation by servicing based on actual usage, replacing equipment at the proper time, and eliminate uncomfortable discussions about overtime or overpayment at the end of equipment lease terms.

Reach out to share your perspective on usage-based equipment financial solutions and chat about DLL’s Lease by the Hour® program. Learn more about our Fleet Solutions.

Theo Rennenberg

Theo Rennenberg

Global Fleet Asset Manager

Contact me to learn more about flexible leasing solutions.