Leasing allows businesses to upgrade equipment while controlling costs.
By Chris Lewis
With a new administration in Washington, businesses are faced with a number of uncertainties, and the waste management industry is no exception. Predictions for what to expect this year include changes that could be good for business, yet some could make doing business more challenging.
These uncertainties can make it challenging to manage cash flow while trying to decide on investments in equipment. Leasing may be just the solution, allowing businesses to upgrade equipment while controlling costs.
Trends Impacting Equipment Needs and Costs
In addition to the potential changes with a new Administration, state and local municipalities鈥� policy changes and new standards will have an impact on decisions regarding waste management equipment. New technologies are also being implemented to assist with fleet management.
Uncertainty Around EPA Grants
Since passage of the 2021 Bipartisan Infrastructure Law, there has been an upsurge in grants from the Environmental Protection Agency (EPA) to fund a wide range of improvements in waste material handling and recycling, thus stimulating demand for new equipment.
Given the Administration鈥檚 actions toward the EPA during the first term, there is reason to question whether those programs will continue at the same pace. Waste management companies may be uncertain whether or when to take on new equipment to take advantage of these grant-based programs.
Favorable Municipality Decisions
While the outlook on the federal level is for fewer regulations and less financial support for waste management and recycling efforts, 鈥渕unicipalities are adopting favorable policy decisions regarding waste management,鈥� according to Benchmark International.
Their report stated that the municipal sector accounts for 53.4 percent of global market share in the industry, which is growing at a compound annual growth rate (CAGR) of 6.3 percent. Municipality budgets have a lot of variability right now for new or expanded waste management programs, but many local governments are still supportive of these efforts.
More Extended Producer Responsibility (EPR) Laws
As more states and municipalities adopt EPR laws, there will be greater demand for equipment to handle the increased amounts and types of materials being recycled.
New PFAS Standards
With the new standards set by the EPA in April for PFAS in drinking water, businesses in the waste management industry may have new opportunities for disposal services and may want to make new equipment investments. Likewise, landfill operators may need to invest in new systems for managing leachate.
Growth in Technology Tools for Fleet Management
Companies are increasingly turning to fleet management software tools to help make decisions regarding repair and replacement of fleet components. Trucks used in waste management undergo heavy use, and predicting their lifespan can be tricky. Likewise, determining whether to do maintenance in-house or to outsource it is not always clear-cut. When replacements are due, owners must look for options that will meet the company鈥檚 needs while mitigating the effects on cash flow.
Navigating Uncertainties with Equipment Leasing
Waste management businesses must operate within an environment that is frequently changing based on public sentiment and governmental decisions. Amidst this uncertainty, some may be left scratching their heads about new equipment purchases as well as the timing of them. Equipment leasing can help manage that uncertainty.
A lease is a financial arrangement that allows a business to acquire the equipment they need without a large initial outlay of cash. In a leasing arrangement, the business chooses the equipment they need and the lender makes the purchase. The business then makes payments to the lender. There are two major types of leases鈥攖he finance (also referred to as capital) lease and the operating lease.
What is a Finance Lease?
Finance leases are best suited to pieces of equipment that have long lifespans鈥攗p to 10 to 15 years. Examples in the waste management industry include shredders, balers, and other equipment used for sorting, collecting, and managing recyclable waste.
With a finance lease, the company contracts for the use of a piece of equipment for a designated time period; there is often a bargain buy-out option at the end of the lease term. Equipment paid for with a finance lease shows up as an asset on the balance sheet, and the lease is a corresponding liability that is amortized over the life of the lease. Depreciation on the asset can be deducted as an expense.
How is an Operating Lease Different?
An operating lease functions more like a routine rental agreement, although there are variations in how they are set up. Operating leases are designed for pieces of equipment that have shorter lifespans. Trash trucks, which last four to five years on average, would fit into this category. The end user makes monthly payments on the vehicle, and there is no expectation that they will take ownership of it at the end of the lease period. The lease payments are treated as expenses, thus reducing the company鈥檚 taxable income.
What Are the Advantages of Leasing?
Leases have grown in popularity so much that the Equipment as a Service (EaaS) market is expected to grow at a compounded annual growth rate (CAGR) of 28.5 percent by 2033 according to a report by Custom Market Insights. Benefits of leasing include:
鈥� Predictable impacts on cash flow: With fixed monthly payments, businesses know how much they will be spending on equipment.
鈥� No large cash outlays: The cost of the equipment is spread out over a long period of time, so there is not a big hit to cash reserves.
鈥� Ease of keeping up with technology: Equipment is becoming more and more technology driven; what is state-of-the-art one day could be obsolete the next. Leasing allows a business to upgrade to newer technology without having to sell off old equipment or expend vital cash to buy new.
鈥� Included maintenance plans: Some leases are structured to include maintenance on the equipment, which can further smooth out cash flow for the lessee鈥檚 business. Not having to absorb unexpected maintenance costs makes financial planning easier.
How to Arrange for an Equipment Lease
Businesses interested in pursuing an equipment lease should look for a lender with experience with these financial instruments. It is also important for them to consult with their financial and tax advisors for any advice, and to stay up-to-date on any IRS changes at www.irs.gov. Some lenders can also act as brokers, connecting equipment providers with end users and setting up the lease with terms agreeable to both parties. The most important factor to consider is the reputation of the lender and their willingness to serve as an ongoing partner in the success of the business. | WA
Chris Lewis is Senior Regional Sales Manager at Summit Financial Group. He can be reached at [email protected].