Few companies, in the crane business or in any sector of the construction industry, can afford to pay cash for all of their equipment. Indeed many would argue that even if you can afford to buy a machine outright, finance remains the route to take to make your money work hardest for you.

‘There are several very sound financial reasons for using a finance house or the asset funding options offered by your bank’s subsidiaries,’ says Simon Burns, national sales manager at Bank of Scotland Construction Asset Finance.

‘Using a second source of finance ensures that your current bank facilities are solely used for the day to day funding of your business. This means that if you need to extend your working capital facilities to accommodate a new employee, or the funding of new equipment, you would be more able to do so.’

But what exactly is available, and how much does it really cost at the bottom line? They’re good questions, and ones that will probably get a different answer depending who you ask. Suffice to say that plant and equipment finance, or asset finance if you prefer, is very big business, with many of the world’s leading manufacturers keen to offer financing options to their customers, either directly or through independent banks and leasing companies.

Everyone knows the basics, but they’re probably worth repeating. Firstly it’s worth remembering that a crane is a high cost, long term purchase, and finance terms will probably be over five years or more, whereas most construction kit is financed over a three year period.

If you want to finance that purchase yourself, you either dig deep into the company’s bank account or you can take out a loan through your bank to purchase the machine.

Then there is hire purchase, where you make regular monthly payments with the intention of eventually owning the equipment. As hire purchase is seen as on balance sheet funding, it means that the company may well be able to claim write down allowances in its accounts.

Or you can opt for an operating lease. This allows you to use the machine, for a set period, for a known monthly cost. You will never own the crane, so it does take away some of the risks of ownership. One of the big benefits is the fact that the predicted residual value is taken into account, so monthly payments may well be considerably lower than a hire purchase deal.

However, particularly in a smaller market, this can prove a more costly option. The bank will obviously want its cut, but as a lease is a higher risk they will charge more. The residual value may not work with their balance sheet, so they will sell that on to a third party who also need to make money. If you then insist on a buyback option then there is no chance of the crane seller making money at the end of the deal, so they’ll load it on at the front.

The third option provides for a greater level of choice. This sort of finance option will carry a number of names, dependent on the financial institution or bank, for example Bank of Scotland calls this option Business Three Ways. Business Three Ways works like a mix of hire purchase and the operating lease, providing the buyer with the option to make a final payment and purchase the machine at the end of the finance period or hand the asset back to the finance company and look for something else.

This option does of course have a number of caveats, condition of the machine, proven servicing and maintenance records and hours operated among them. With some providers it is even possible to refinance the final payment part of the deal, if you decide that you do want to keep operating the machine but don’t have the funds to make a big balloon payment in one go. With this kind of agreement the monthly payments will usually be lower than with a traditional hire purchase option.

‘Don’t be afraid to ask your asset funding specialist to explain the funding options available in layman’s terms,’ says Burns. ‘Will I own the kit at the end of the period? Will the option go on or off balance sheet? Does the rental price quoted meet the cash flow you had in mind to fund the investment?’

However the most important point to remember is what are the whole life costs of the deal, from start to finish. Headline grabbing interest rates don’t really mean a thing, if there is a big payment at the end to finalise the deal. Add up all the payments, including any administration fees and set-up charges, and work out what you are going to pay in total.

‘Our preferred method of financing is hire purchase,’ says UK crane rental giant Ainscough Crane Hire’s finance director Neil Partridge.

‘Some people prefer leasing because it’s off balance sheet. My view is that everyone should have on balance sheet debt to enable them to manage the business better. If a small operator wants to avoid residual risk in the asset, he may prefer an operating lease, but the true cost is likely to be greater,’ he says.

Deane Manley, finance director at New Zealand Crane Hire, sees it slightly differently. ‘A lot depends on whether the crane rental company sees the individual crane as having a long life with their fleet or somewhere else. The longer the life with them, the more likely they are to want to fund it on balance sheet,’ he says.

‘Some rental companies may see a mid-range all terrain as having a useful life for them of seven to 10 years, to keep them at the leading edge of safety, boom lengths, speed of set-up and maintenance, while their competitor buys this vintage of crane as its flagship,’ says Manley.

‘I think also that too many people in the industry place too much emphasis on building a business based on asset values, and do not pay enough attention to the cashflow and profits that can be generated from the biggest assets of the business, being the trained staff and their customers.

‘A balance between on and off balance sheet financing in my opinion helps to change this mindset and focus not on the accumulation of a pile of scrap metal, but on what delivers the biggest bang for your buck, which for any business owner has to be sustainable return on capital.’

So you’ve worked out what the machine is going to cost, and whether you want to own it at the end of the financing period, but what are the possible drawbacks of finance, other than the fact that it’s costing you money?

‘HP is the most simple means of funding. Operating leases oblige the lender and the borrower to take a view in terms of residual values, which can make the underlying borrowing expensive, but eliminates the risks on disposal. Loans, or chattel mortgages as they are known in respect of assets like cranes, are more administratively burdensome and more difficult to settle if a crane is sold before expiry of the loan,’ says Ainscough’s Partridge.

New Zealand’s Manley takes a different view again. He says that, given the specialist nature of crane rental, the problems can often be more with the funding companies than the actual financial product. ‘The biggest drawback to any type of financing is the organisation providing the finance and the inflexibility, lack of understanding of the assets and the credit scoring mentality that comes with dealing with what sometimes seems like a behemoth bureaucracy,’ says Manley.

‘Occasionally you will come across a good company or guy to deal with, but inevitably they will be ground up and spat out by the machine. I’ll bet every crane owner in the world would come up with a good rhyme for banker when they get told that their bank manager will fund 85 per cent of the cost of a new crane but only 75 per cent of the second hand one. They just don’t get it.’

As mentioned, some manufacturers are able to offer finance through their own asset funding divisions, or joint venture companies set up between the crane builder and a financial company. This certainly leads to a greater understanding of the asset and the market in which it will be working. Earlier this year Terex made further moves down this route, extending its Terex Financial Services (TFS) operation into Europe for the first time.

TFS is backed by the Dutch asset finance organisation De Lage Landen. ‘This move adds an important dimension to the ongoing co-operation between Terex and DLL,’ says De Lage Landen’s European division executive director Gerard van Kaathoven. ‘We will be able to offer Terex a pan-European sales financing program that addresses the need for financial services throughout Terex’s customer base.’

Terex Financial Services has offices in many mainland European countries, with new sites due to open in Scandinavia and Poland in the third quarter of this year. As one of the world’s biggest asset finance organisations, De Lage Landen also provides the asset funding for Hitachi Construction Equipment throughout Europe.

TFS is not the only company eyeing up Europe, as Bank of Scotland will also be making a move into Continental markets next year. ‘We will be moving actively into Europe in 2005,’ says Burns. ‘Mainly into countries that we already have relationships with.

‘We are very busy in the UK, particularly on cranes. Continental Europe is also very busy. There is growth in the market and the investment is there to support it,’ says Burns.

Of course if you’re not happy with the finance deals on offer from established organisations, you could always set up your own asset funding business. That’s not as mad as it sounds. New Zealand Crane Hire has recently established an equipment financing business – Equipment Capital Group – in response to what it sees as the current overcrowding of the finance market in the country, but the almost total dearth of firms that truly understand plant and equipment.

ECG offers a range of finance and leasing options for mobile, harbour and tower cranes, elevating work platforms, telehandlers, reach stackers, agricultural equipment, heavy transport trailers, portable buildings and road safety equipment.

‘As we worked through some of the questions from people that couldn’t make the connection between equipment finance and crane hire it dawned on me that all companies such as ourselves are in fact just the same as leasing companies, except we lease our staff’s skills, safe practices and brains as well as the equipment, and we have the balls to do it by the hour,’ says Manley.