GE Capital, Corporate Finance chief commercial officer Eric Dusch discusses equipment finance’s ability to foster innovation and the importance of the opportunity it affords to learn about the market and keep abreast of developments.
Innovation is critical to sustained profitability, and equipment finance is a key enabler of innovation by allowing the enterprise to acquire the latest, most advanced equipment and technologies. In fact, a recent survey by the National Center for the Middle Market (NCMM) found that 40% of manufacturers attributed 12%–14% of their profits to new process innovation. Unfortunately, it’s tough to innovate consistently and keep profits robust. That same survey found that 61% of business executives rate innovation of new products, services or processes in their organization as highly or somewhat challenging.
To most executives, these survey results are not a huge surprise. But what is generally less understood is the role that equipment financing can play in consistently introducing innovations into the business. New equipment and better machines are, after all, the linchpin of incremental efficiencies and benefits to end users. The latest equipment and technologies tend to lower costs and increase productivity. What’s more, today they are often equipped with big data capabilities that allow companies to analyze and further refine processes.
The dilemma for capital-intensive companies often comes down to expense. Most can’t or don’t want to part with so much precious cash on new equipment unless absolutely necessary. However, by financing equipment with a loan or lease over five, seven or even 10 years, a company can better manage the yearly expense of new equipment. By conserving cash in this manner, a company is more agile, and can redirect investment to take on the challenge of delivering new products and services and funding research and development. It’s also helpful to conserve cash for protection if the economy were to experience a downturn.
Defined as companies with revenue between $10 million and $1 billion annually, the middle market includes an incredible diversity of business structures. Given the need to innovate, it’s important for mid-size companies to develop an equipment financing strategy and establish a strategic relationship with their lenders before they actually need access to financing.
For smaller companies that might initially have trouble securing equipment financing — say $50 million in revenue and below — it’s imperative to be upfront about challenges and demonstrate sound financial controls and audited financials. Lenders are particularly interested in seeing that the company has good relationships with vendors based on timely payments.
Larger companies with $100 million in revenue or greater sometimes lack a network of relationships with banks and equipment lenders with whom they can have an ongoing dialogue. A CFO might spend 1%–2% of his or her time thinking about equipment financing, but an equipment finance specialist spends 100% doing so. CFOs should view lenders as a strategic supplier and take the time for “knowledge sharing” with these experts. Time spent is an opportunity to learn about the market and keep abreast of developments.
Five Innovation Typologies
But size is not the only determinant for how companies approach innovation and equipment financing. Even companies in the same capital intensive industries can have very different approaches. The research from the NCMM revealed that middle market companies have qualities that are uniquely different from start-ups and larger, hierarchical organizations. This driving force of the economy is known to organize their project/innovation teams in five distinct ways, called typologies, which result in different approaches to equipment financing:
Frequent businesses continually innovate because their business model compels them to. However, the rapid pace of innovation may inhibit their ability to maintain long-term strategic focus.
First companies want to be first in a new market and are particularly adept at looking at their core product or service and identifying new ways of entering adjacencies.
Fast firms let their “first” counterparts assume the risk of proving a market opportunity and then respond quickly with a competing product or service. They benefit from having smaller research and development teams and often compete on price in head-to-head comparison marketing.
Finder companies are experts at identifying unarticulated customer needs and shaping them in new ways through design, functionality and marketing.
Fat businesses are content with the status quo. They have successful products or services, usually with healthy profit margins, and typically resist spending time or resources to improve them. They view innovation as a drain on the bottom line.
What’s interesting is that no matter what a company’s typology, the total cost of innovation and the requisite equipment financing over the long-term may be fairly similar; the key differentiator is the pace of that innovation. The frequent business will be constantly rolling out incremental improvements, while the fat business will hold off as long as possible but may eventually face a huge, expensive equipment upgrade when the time comes. The lesson is that no matter what a company’s size, or typology, it’s critical to plan ahead, nurture a strong network of lenders and develop an equipment financing strategy to drive innovation. This corporate mindset is critical for long-term competitiveness and sustained profitability.
Eric Dusch is Chief Commercial Officer, Equipment Finance at GE Capital, Corporate Finance, specializing in providing commercial loans and equipment leases to mid-size companies for growth, acquisitions, turnarounds and balance sheet optimization.