March-April 2010

Competitive Advantage

With equipment leasing, energy equipment vendors can offer customers solutions that pay for themselves.

With businesses of all types these days reacting to the challenging economic conditions by holding on tightly to cash, energy efficiency equipment vendors are scanning their playbooks for new ways to close more deals, set themselves apart from the competition, and, ultimately, add to the bottom line.

This is where equipment financing comes in as a competitive advantage for energy efficiency equipment manufacturers, vendors, contractors, and installers, by making possible energy-saving upgrades that save a building owner money through reduced energy costs.

Most everyone agrees that vendors of energy efficiency measures are expected to play a leading role in decreasing America’s energy consumption and carbon footprint. That said, the energy efficiency sector still faces the broader challenge of competing for the scarce funds available for capital investment. While increasing sales is nearly always a good business strategy, many companies overlook a simple method of accomplishing this objective—making it easier for the customer to buy.

This is where equipment leasing can assist energy efficiency businesses in creating cash-flow-neutral—and, in some cases, cash-flow-positive—energy efficiency upgrades for their customers’ buildings.

By working with one or more partners to integrate equipment financing into their energy-saving proposals, these businesses can provide a total solution for their customers that is environmentally friendly, improves their building, and also makes smart financial sense.

There are other benefits of leasing for customers, including no money due up-front to start an energy project, and the ability to conserve cash for their core business. In addition, since cash flow management is particularly important during a recession, customers can use leasing to match lease payments with energy savings and reduced-maintenance costs.

By offering an equipment finance option as part of the sales process, Energy Services Companies and other energy efficiency businesses can also:

• Generate larger, more-profitable sales faster
• Improve sales efficiency and productivity
• Improve cash flow

For building owners, equipment financing can play an integral role in making an energy efficiency retrofit possible. Just about every kind of building can benefit from energy-saving improvements. These include hospitals, office complexes, retail centers, universities, government entities, schools, manufacturing plants, and other commercial facilities.

In addition, most people don’t realize that just about any kind of energy upgrade equipment can be leased. Products and technologies in lighting and HVAC systems, for example, continue to advance and expand the options for facility owners considering energy efficiency retrofits. Such upgrades could also include solar photovoltaic and hot water systems, small wind systems, and geothermal heat pumps, to name a few. In addition, the equipment, as well as the associated “soft costs” of installation—generally 50% of the total price tag—can be included in the lease.

Because these installations can generate energy and maintenance cost savings that surpass financing costs, they’re often a win-win solution for customers looking for ways to conserve both energy and money, especially in this cash-sensitive economy.

Take lighting, for example. Energy-efficient lighting is readily available, quick to install, and a proven energy saver with payback periods between two to four years. Consider a high school that wants to undertake a $150,000 lighting retrofit, but does not have the budget. Through equipment financing, the school can complete the project without any capital outlay and realize a projected savings of $57,000 per year on its energy bill. Those energy savings, by surpassing the $56,700 annual leasing cost for a three-year agreement (or the $44,300 annual leasing cost on a four-year agreement), result in a cash-flow-positive project. After the three- or four-year lease term ends, the school will continue to benefit from the reduced energy costs and improved quality of the facility without making any further lease payments.

Equipment financing of energy-saving upgrades thus offers the important benefit of making the upgrades cash-flow-positive from the start of the project. And when the financing is based on a capital lease (instead of an operating lease), the customer receives full benefits of ownership, such as accelerated depreciation, and a variety of federal, state, and local energy efficiency incentives.

Some of the other recognized benefits of leasing energy-saving equipment include:

• Tax treatment—The IRS does not consider certain leases to be a purchase, but rather a tax-deductible overhead expense. Therefore, building owners can deduct the lease payments from income.
• 100% financing—Since a lease often does not require a down payment, it is equivalent to 100% financing.
• Immediate write-off of the dollars spent—With leasing, payments are treated as expenses on the income statement, so equipment does not have to be depreciated over an extended term.
• Flexibility—As a building owner’s capital equipment needs change, the lessee may be able to add or upgrade equipment at any point during the lease term.
• Improved cash forecasting—By leasing energy-saving equipment, building owners can accurately forecast the cash requirements for equipment since they know the amount and number of lease payments required.

Given the broader trends toward cash-preserving projects, there are a number of important things to consider when selecting an equipment finance partner, including whether the company knows and understands your industry and its unique business needs. This is particularly important in the energy sector, given the rapidly advancing technology, ever-changing tax regulations, and sometimes-complex installations involved.

By choosing a partner with expertise in financing energy-saving equipment, manufacturers and vendors of these products—as well as contractors and firms that install them—can generate more sales faster and close more deals by providing customers with energy efficiency solutions that are effectively paying for themselves.