Equipment rental the financing tool of choice

Why buy machines, when you can get the same thing on hire.

Businesses need to stay competitive and modernize to keep up with changing needs, but they often don’t have the budget for expensive equipment that will soon become obsolete. A challenge faced day after day by startups, SMEs and MSMEs, where limited capital has many applicants, but you want the best and most technologically advanced machines for your operations.

An alternative option available to businesses with limited initial capital is equipment leasing. Equipment rental contracts are available from leasing companies, banks and other financial institutions. With this form of asset financing, a leasing company will lend the equipment for a period of time in exchange for regular lease payments. By acquiring machines on lease, companies can access the latest technologies and be competitive without unnecessarily straining their cash flow.

Equipment leasing is often a more cost effective alternative to debt financing. Leasing allows the acquisition of machinery and other capital goods without paying the full cost upfront. Leases are generally flexible, offer a tax advantage and are transaction-free (no mortgages). In addition, start-ups, SMEs, MSMEs and other businesses can save their capital as well as collateral (security to qualify for bank financing) for working capital purposes.

The future of global equipment leasing

With technology (computer equipment) companies and manufacturing entities constituting the largest customer population of lease finance providers, the equipment leasing market is set to grow. Startups and SMBs need advanced and expensive equipment, but are driven by profitability, and lease financing offers them a win-win platform.

The global machine rental market was estimated at $820.27 billion in 2019, with a projection of $1.76 trillion by 2026, growing at a CAGR of 12.3%. Much of this growth can be attributed to companies that have reorganized their operations in the wake of those left behind by COVID-19. While the pandemic initially dampened demand for machinery and equipment, a subsequent liquidity crunch accelerated the adoption of leasing as a sound financing alternative. Leasing provides businesses with the latest equipment and maximum uptime without any capital investment.

Leasing in India

As the global equipment rental market continues to grow at a rapid pace, equipment rental in India is in its infancy. Equipment leasing in India accounts for about 1% of the broader market, compared to the global leasing average of 35-40% of the overall market. However, several factors will propel the equipment rental market over the next decade. For example, India’s broader machinery equipment industry offers significant growth opportunities with a CAGR of 7.3% over the next decade. Thus, the total addressable market will grow from $133 billion in 2020 to $250 billion by 2030.

Offline rental accounted for 98.2% of the total market share, with online services accounting for a meager 1.8%. However, strong digital adoption and innovative financing models are expected to enable the online rental market to grow at the highest CAGR of 10.4% during the forecast period. Additionally, the machinery and equipment rental market will see the tailwinds of a shift to online services.

More recently, leasing companies in India have started offering end-to-end solutions, including asset lifecycle management, to their customers. This unique solution covers assessment, provisioning, assurance services and maintenance, upgrades and equipment returns. They also offer equipment recommendations based on business needs/technical requirements and return on investment. Many original equipment manufacturers have set up captive finance and leasing units in India. This trend should continue. Banks have also set up special vertical markets for leasing finance. Leasing investment is also becoming popular in the Indian market as an excellent tool for diversification in the field of asset-backed investment.

Startups and Leasing Financing

Several startups in different verticals have grown rapidly by adopting leasing. Some examples include transportation services such as Ola, Rapido, Big Taxi, and Bounce; Equipment suppliers, including Rentsher, Furelnco, Rapidbox and Bigspoon; Electric vehicle charging stations such as Chargezone and BatterySmart. With startups being the main drivers for the growth of leasing financing, given that India is the hub of startups, the growth of equipment leasing financing in India is inevitable.

For Indian startups, Leasing is cheaper than buying and more efficient in the long run because it allows them to upgrade their inventory with newer models at little or no cost. The growing awareness of lease financing and the benefits it brings to the table is increasing traction within the fraternity.

Conclusion

Equipment and machinery leasing has traditionally been underrepresented as a source of finance in India, having a low market share compared to its global counterparts. However, rapidly changing technology, shorter machine lifespans, high cost of upgrades, and low resale value are forcing companies to consider equipment lease financing to stay ahead of the game. in advance without bleeding. Innovative end-to-end solutions and new offerings from banks and NBFCs are all contributing to the growth of buy-to-let investment as a vertical.

Equipment leasing is becoming a lucrative option for those looking to grow their businesses as low-capital businesses.

(Author Mr.Shrikant Goyal, Co-Founding Member and Managing Partner, GetFive and the opinions expressed in this article are his own)

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