In this article, originally published in the February/March issue of Ramp Equipment News, we take a look at the subject of flexibility within GSE provision and a trio of solutions.
As the number of air travelers continues to rise, the need for reliable ground support equipment increases in tandem. By financing or leasing ground support equipment, ground handlers can preserve capital, gain access to the newest equipment and have the flexibility to support changing business and financial needs.
According to the Equipment Leasing and Finance Association (ELFA), 78 percent of U.S. companies use some form of financing when acquiring equipment. From dollies to refuelers, there are several financing solutions available to those acquiring GSE. The best option for an organization will depend on the desired use of the equipment.
The Fair Market Value Approach
If you simply wish to use the equipment, a good option in this scenario is a Fair Market Value lease, often known as an FMV lease. This is the most common type of lease. An FMV lease is typically leveraged when a customer just wants to use the equipment, and wants multiple options available to them at the end of the lease term (which is typically 24-72 months):
- Option 1
Trade in the existing equipment for newer models. When this option is chosen, the lease is renewed for the new equipment with the lender or financing company, who will also typically come to retrieve the old equipment. For example, this could be a great option for a ground handler that might like to upgrade to new electric GSE. This option allows the ground handler to continually upgrade equipment at the end of the term, providing clients with the best experience without needing to purchase new equipment every few years and figuring out how to get rid of the old units. - Option 2
Return the equipment altogether. If ground support equipment will only be needed for a short term, such as a three-year contract that matches the client’s contract, or if needs change by the end of a lease agreement, customers have the option to end the contract altogether at the end of the term and return the equipment. - Option 3
Purchase the equipment. If a customer decides they wish to continue using the same equipment, they have the option at the end of the lease agreement to purchase the equipment for its residual value.
With an FMV lease, it is the financing company that actually owns the equipment, but offers customers the lowest monthly payments. With an FMV lease, a customer is only paying on part of the equipment’s value but gets to use 100 percent of the equipment.
If an organization intends to use equipment for a short period, or wishes to upgrade after 2-4 years, an FMV lease is the right option.
The Dollar Purchase Option
A Dollar Purchase Option, sometimes referred to as “dollar-out” or a “buck out,” is similar to an FMV lease in that the financing company or lender still owns the equipment and leases it to the customer, but options at the end of the term are more limited:
-
Option 1
Return the equipment altogether. Again, similar to an FMV lease, with this option, the customer can end the contract at the end of the term and return the equipment. - Option 2
Purchase the equipment. Buying out the equipment at the end of a Dollar Purchase Option lease differs from doing so at the end of an FMV lease in that with this option, the equipment can be purchased for a nominal fee, which is typically US$1.
Customers who choose a Dollar Purchase Option are pretty sure that they will want to keep the equipment at the end of the term, but still want the flexibility to have the option to return it, should needs change. If a ground handler knows they need to acquire more de/anti-icing vehicles, but doesn’t want to have a large balloon payment at the end of the lease term to purchase it, a Dollar Purchase Option could be the best choice to spread payments out evenly, with minimal cash required to purchase at the end of the agreement.
The equipment’s residual value is essentially wrapped into the monthly payments, so monthly payments with a Dollar Purchase Option are typically higher than those of an FMV lease. That said, the purchase price at the end of the term is significantly lower as a result.
If a customer is confident they will want to keep the equipment, but wants to option to return it, if need be, a Dollar Purchase Option is certainly a choice worth looking into.
The Asset-Backed Loan
Finally, there is the possibility to finance the GSE through monthly payments that ultimately lead to ownership.
If a customer is certain they want to own the equipment but wishes to make payments on it over a specified term, then an asset-backed loan can be the path to take.
In going down this route, a customer takes out a loan that is spread over a defined term, after which the title is transferred and the customer owns the equipment.
Acquiring a loan essentially offers no options other than to own at the end of the term. However, if a customer is looking to finance software only – say, a ground handler only wishes to finance telematics to more efficiently manage a fleet of equipment – this is the only financing structure that can be leveraged since there is no asset that can be returned.
Regardless of the financing option chosen, insurance is required. While this is typically something most companies have in place, if a company has never financed equipment and doesn’t have the required insurance, it can often be included in the contract and wrapped into the monthly payments.
Conclusion
Unlike financing or leasing a car, financing equipment offers a number of flexible solutions to meet a variety of business objectives and improve operational efficiency. Stay tuned over the next year for more information on financing solutions available for those involved in the GSE market.
