Interest rates are high – How do I afford more rental equipment for my business?

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Two years ago, interest rates were so low equipment rental companies could finance significant amounts of new equipment. While that made life simpler than the high interest cost environment of today, it also encouraged sloppy purchasing discipline. Credit, whether for purchasing new equipment or leasing, was readily available. So how do we cope today if we need new equipment, a certainty as customer needs and technology change. As an example, many companies need zero emissions equipment to rent to customers. The following options are relevant for anytime you are looking for creative solutions to this problem.

 

Consider sub-renting or re-rentals to expand your rental offerings into a new product line

This strategy can be used to expand a line of equipment but can also allow you to rent entire lines of equipment not normally carried by your business. We all know how important it is to keep your customers close by never saying “no” when they ask if you have equipment available. We know of one rental company who refused to buy boom lifts because the prices were too competitive in their market and maintenance requirements were too high. Instead, they regularly sub rented these units on demand from their competitors, leaving the price fluctuations and maintenance requirements to them. Sometimes the cost of sub rentals can seem high but it doesn’t require any training for your technical staff, no stock of spare parts, and often you don’t even have to deliver or pick up the equipment. It is critical to have a rental software system that efficiently manages sub rentals to ensure you are receiving maximum value and get the sub rented equipment back just as soon as it goes off rent. Don’t try this without being committed to regular analysis of the results.

 

Up your game on utilization metrics, both time and financial, to identify equipment lines to expand or contract

The old days of buying or leasing equipment any time a new rental opportunity comes along are long gone. Be disciplined and thoroughly analyze your fleet make-up and rental profitability. What is the time utilization of a specific equipment category and of individual units? It may be that a line of equipment just isn’t rented often enough to be worth carrying, especially when considering all of the overhead necessary to service it. Are the rental rates for equipment high enough to be worth carrying the equipment? Do customers still want this type or generation of equipment? Is the equipment type or individual unit susceptible to mechanical breakdowns or do the units wear out too fast? This is the type of information that will help you decide whether it is worth carrying a category. If not, either reduce the investment in the equipment category and rely on sub rentals, if you still want to rent the equipment, or eliminate the category entirely and use that cash to buy what you really need.

 

Keep on top of technology trends for the next three to five years

Keeping your focus on what customers are asking for today is to become reactive. You need to be proactive, survey your customers, talk to the manufacturer representatives, and analyze your competitors. There will always be people you prefer not to deal with but at the end of the day it pays to think of the combined fleets as something you have access to. Analyzing the fleets of your competitors after you have identified the trends in the next few years is the best way to identify gaps you might be able to take advantage of.

 

Increase demand by fine tuning your investment in digital marketing

If you don’t know what “digital marketing” is, you are definitely behind the pack. It is a huge mistake to view marketing expenses as a “soft” expense that can be cut back any time there is an economic slowdown. If your firm believes marketing does not work, you probably have a problem with the quality, efficiency, or amount of marketing that is being done. As an example, if you use Google AdWords and find they are not as effective as you would like, there are several questions you need to answer. Does your messaging match what customers are looking for? Are you spending enough? Just throwing more money at the problem won’t necessarily fix the problem but having a budget to do some A/B testing to see what actually works is critical. Does your website accurately represent the image you want for your business? How much content are you generating?

 

Nurture contacts and generate more long-term leads by becoming a thought leader on social media

If you can improve the utilization of your existing equipment by generating more leads, you may not need to buy more equipment. Depending on the type of equipment you rent, you need to identify the most effective avenues of social media. If you rent large excavators, you may find the only social media platform that makes any sense is LinkedIn. But that only works if you put the effort into becoming a thought leader by making posts and interacting with your connections. If your profile on LinkedIn only has a hundred connections and seven followers (and six of those are your extended family members), you need to do much more as many marketers will argue this is the most effective method of outbound marketing for business-to-business sales.

 

Talk to new and existing finance or lease partners

You might think these companies make more money when interest rates are high but that is only if they are able to get customers to commit to new contracts. If people are sitting on their hands because of high interest rates, they get nothing. You might be surprised at the offers you might come across as they may be desperate for deals. If you believe interest rates are going to decline you might want to consider variable interest rates, which might appear more expensive today but might be just fine in a year. You will want to be very selective about the equipment you add but adding the right type and quantity of units can potentially lead to more profits.

 

Check with your favorite manufacturers or equipment dealers

They too may be looking to unload equipment. Manufacturers are motivated to keep their plants running. Selling equipment at a discount can be better for them than shutting the doors for a period, which causes numerous supply chain problems and can lead to issues with staff retention. Some manufacturers may also offer specialized interest rates or even floor plans with no interest or zero payments for some period of time. You don’t want to overextend yourself here but it you have a solid sales pipeline for the immediate future, this is worth considering. Buying equipment at a discount effectively reduces the overall interest you would have paid on the full price, bringing the effective rate down to a more manageable level.

 

There is good used equipment around

 Slightly used equipment can be had for attractive prices, especially if you can find someone that is downsizing or moving out of an equipment segment you are interested in. Finding equipment at a 25% to 40% discount will significantly reduce the interest you will pay when you finance these units.

 

Look for longer term rental contract commitments

If you can incentivize your customers to take on longer term commitments, you have a guaranteed cash flow and can consider paying more interest if you have a consistent revenue stream. It might require a bit of a discount on your rental rates but it is probably still worth the discounts and higher interest rates to earn something.

 

Chase down those receivables or utilize spare cash

Collecting overdue receivables generates extra cash flow that can be used to increase down payments on equipment. This will reduce the interest paid. Extra cash means less interest. It might be time to personally invest some cash back into the business if you have been able to pull profits out over the year.

 

Evaluate the profitability of your customers

Maybe you don’t need more equipment. Maybe you just need to stop renting to less profitable customers and concentrate on those who pay more and pay faster. Along with evaluating the profitability of certain lines of equipment, customers need to be evaluated periodically as well. What worked last year may not work this year. Higher interest rates mean you need a higher rate of return to be profitable.

 

Look for cost savings

If you can figure out how to save money, reducing a salary here or there, eliminating or reducing some operating expenses, it can free up cash flow to service higher debt costs.

 

That’s it! We hope this information is useful to you. Many of the principles are sound even after rates go down but in early 2024 we still have to deal with high interest rates. Whether you’re looking to increase productivity in new ways, increase efficiency, or looking to future-proof your business contact our team at hi@opendoorerp.com.

 

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