Many CFOs who are faced with a backlog of deferred maintenance projects and budget constraints evaluate financing as a strategic tool to complete critical projects that need to be done today. Bonds offer an attractive option for businesses to finance large improvement projects at low, fixed rates over longer terms. While many companies utilize bond financing for long-term building projects, carving out separate financing for shorter useful life assets can provide the following benefits:
1. Reduce Overall Interest Expense
Separating shorter useful life assets from the longer-term bond issuance provides a great opportunity for companies to avoid added interest expense. Let's assume a business is going out for a $10MM bond issue for a building renovation project. The 20-year bond has a fixed interest rate of 4.0%. The $10MM renovation costs include $9MM of traditional renovation charges, and $1MM of various technology and furniture purchases.
The illustration below summarizes the total interest expense of two approaches to financing a project for a hospital:
2. Avoid Paying for Assets Beyond their Useful Life
Rolling shorter useful life assets into longer term bond issues results in businesses paying interest on assets that are no longer in use. The technology, equipment, networking infrastructure, or new furniture will be replaced years before the 20-year term expires. Why incur interest expense on equipment, technology, or furniture beyond its useful life?
By matching funding with the asset life, businesses can reduce maintenance costs and improve operational efficiency with the latest equipment. The diagram outlines the estimated useful life of assets commonly separated from longer-term bond issues:
3. Faster and Easier Processing than Bond Financing
It’s a common misperception that incorporating leases for shorter useful life assets adds complexity to your bond issue when it is actually very easy. The lease process has a lead time measured in days and can be completed much faster than bond financing. Equipment leases also lack the complex terms and conditions of a bond issuance:
No additional collateral requirements (only secured by equipment financed)
No additional fees or setup costs
Customized repayment schedules to meet budgetary needs
Equipment leasing for short-term assets is an effective solution for businesses to align funding with useful life and reduce interest costs – all through a simple financing process. Complementing long-term bond financing with short-term equipment leasing can be a helpful tool for businesses to address key projects and provide employees and clients with the latest equipment needed to operate at the highest level.