Funding a major warehouse expansion
The type of industry a company is involved in largely determines the nature of its capital expenditure (CAPEX). In our current challenging economic climate, the likelihood of any mid-size organization being able to fund new CAPEX with its own cash is small. Funding a major warehouse expansion or building a new facility requires long term finance which is normally secured through lease.
Funding required for the purchase of items such as new materials handling equipment, vehicles and I.T hardware is another matter. Funds are needed to support supply chain improvements allows a company to stay competitive.
Only the purchase of new assets and upgrades to existing assets qualify as CAPEX. If an asset’s useful life will be more than a year, then the company must capitalize the expense, using depreciation to spread the cost of the asset over its designated useful life as determined by tax regulations. Capital expenses are most often depreciated over a five- to 10-year period.
An upgrade can extend an asset’s life or improve its productive capacity in some way. The pressure to save costs is ever present, innovative solutions are needed to make the most productive use of available resources.
Types of financing for CAPEX
CAPEX financing can be arranged in various ways, it depends on your company’s needs and financial situation. For property investments with a time horizon of more than ten years, lease finance is usually recommended. For asset purchases, normal practice is to use bank facilities, often sourced through a financial intermediary. Asset management companies and banks, both big and small, have facilities that provide the expertise to guide you through the minefield of options. They work directly with such equipment manufacturers such as Komatsu, Caterpillar, Cummins, Hitachi, Kubota and Linde.
The funding choices range from hire purchase, through various types of leasing, with or without maintenance, to rental options and unsecured loans. They enable you to preserve capital and generate income from your new assets while paying for them.
Whichever route is taken, the asset financier or the bank will pay upfront for the equipment (and maybe maintenance costs) you need and let you make structured repayments to them by agreement. There are pitfalls, of course, it may pay to take advice from an independent warehouse consultant before signing the paperwork.
Hire or Lease Purchase
Hire Purchase spreads the cost over a given period and enables you to acquire an asset while paying for it in instalments over an agreed timescale – the term. At the end of the term, you have the option to purchase the asset outright. This method is most suitable for vehicles, machinery, construction and commercial equipment with a resale value. A lease purchase is similar but a bit more flexible. You can choose the agreement, terms and interest rate structure that best suits your requirements, including the amount of initial deposit you wish to make.
This method provides the benefits of use without any ties of ownership. It is effectively a rental which can be tailored to your usage needs and cash flow. At the end of the term you may have the option continue to rent the asset for a nominal sum. Leasing can offer great flexibility and is ideally suited to businesses enjoying rapid growth.
This is an option for a business that needs an asset only for a pre-defined period of time. The leasing company has the obligation to maintain the equipment. Payments can be aligned with the income generated by the asset itself. At the end of the lease, you will have the option to extend the agreement or simply return the asset to the financer, which will remove your responsibility for – and the cost of – the disposal.
The financing of innovation
Advances in mobile technology are providing opportunities to automate materials handling equipment and to monitor equipment use through remote access. This requires investment in expensive I.T. hardware and software. In addition, the growth of e-commerce is placing demands on retail warehouse systems that may turn out to be a game changer. More work for asset finance companies.
In the warehouse, energy consumption is an area where savings can be made. New analysis from the Energy Efficiency Financing (EEF) scheme has revealed that the warehouses are overspending on energy to the tune of over £190 million per year in UK. This is in part due to inefficient technology, equipment and controls which need upgrading or replacing.
Increasing environmental concerns means that manufacturers need to fund new types of assets such as solar energy-powered vehicles and hybrid trucks and buses. Electric forklifts can replace diesel-powered ones, for example, which have the added benefit of reducing carbon emissions.
Raising finance for energy-efficient investments is a challenge despite the on-going drive to encourage companies to adhere to sustainability targets. Usually small businesses do not have enough cash to buy capital equipment that they might want or need for environmental development projects.
An EEF scheme, a joint financing initiative between the Carbon Trust and Siemens, was set up to make finance for the acquisition of energy-efficient equipment more accessible and affordable for companies, especially SMEs. . EEF supports new technologies such as low energy lighting, energy-efficient motors, low carbon air conditioning and biomass heating. The Carbon Trust has already helped over 35,000 customers introduce £1.6bn worth of energy efficient equipment, resulting in a £4.5bn reduction in energy costs.
Despite such worthy initiatives, there is a general financial squeeze on access to credit facilities which is not likely to improve significantly in the near future. On the plus side, there are many players in the business of funding industrial assets, both banks and their intermediaries, which means interest rates are negotiable.
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