So you’ve won the new bid or have the new production contract in place. Or maybe you made the decision to upgrade your IT infrastructure to create new efficiencies. Either way, equipment purchases that require a healthy chunk of capital are a central component of those strategies. And while you may have planned for the cost of the equipment, often businesses forget to plan for a significant portion of the total equipment expense. We call them “soft costs.”
Soft costs are everything from installation, warranties, delivery or even assembly in some cases. As equipment becomes more easily customized to meet your company’s unique requirements, more soft costs are often required to get the equipment up and running. And don’t disregard the financial impact.
It can cost up to $10,000 just to get an articulated dump truck delivered. IT services, installation and engineering can add thousands to an IT purchase. Some manufacturing equipment can take more than a year to be assembled and installed, with components shipped from dozens of vendors across the globe.
The Problem with Soft Costs
These additional costs can create serious financial issues. Soft costs — most of the time — have no real “value” and add no value to the equipment long term. They are necessary one-time expenditures to get the equipment running that cannot be transferred upon resale. And that makes most bankers run for the hills.
You may enjoy your very-low-rate financing for the equipment, but when you evaluate the project in total — including soft costs — you could find yourself investing some pretty big money out of pocket to pay for everything, defeating the purpose of preserving capital through financing. So, all in, the cost of the financing is actually quite a bit higher when you consider the required cash investment for soft costs.
The other financial issue is that soft costs typically happen up front — before the revenues start rolling in from your equipment investment. This cash outlay can create severe cash flow burdens when you need cash the most. Ramping up for new business or creating new efficiencies can require more capital on hand to create inventories, hire staff and invest in marketing. Tying up cash during this time for things like installation and delivery can create real challenges to executing your strategic plans.
There is the possibility of a better approach. Finding a lender with a strong specialty in equipment financing and who understands more than just the invoice amount is key. These lenders understand the impact equipment like this can have on your business. And as long as soft costs stay within certain parameters of the total investment, you can fold them into your affordable monthly equipment payment, preserving your cash for more important needs.
As equipment becomes more easily customized to meet your company’s unique requirements, more soft costs are often required to get the equipment up and running.
Ready to Help
At PNC Equipment Finance, we can help businesses like yours tackle the soft-cost issue. As the 4th largest bank-owned equipment-finance company, we have deep experience financing even the most complex equipment and project needs for mid-size and large companies. Connect with PNC by going to www.pnc.com/ef.