Usage-Based Financing

How Performance-Based Data Can Improve Equipment Financing

Tuesday, February 27, 2018

When you consider the applications of innovative technology to business success, it is unlikely that equipment financing is the first concept that comes to mind. However, equipment financing has become a critical asset to the financial success and performance capabilities of today’s manufacturing operations. Capital restraints often hinder the growth and limit the flexibility of manufacturing operations, and traditional financing has, until recently, remained a standard despite tremendous advances in machine intelligence.

With the emergence of connected machinery and innovations in data availability, there are significant opportunities for manufacturers to improve the efficiency and effectiveness of machinery financing options.

Most businesses have historically resisted change because change brings confusion and problems within large companies.  However, these issues may be avoidable by leveraging blockchain technology to collect and display machine data that drives business within the manufacturing industry

Financing Industrial Equipment

The increasing intelligence of machines is driving the cost up and creating financing problems within the manufacturing industry.  Industry 4.0 and the beginning of the “Smart Factory” will revolutionize industrial manufacturing as we know it today.  With the increase in machine IQ the financing for these assets becomes more complex.  The current manufacturing standard are large upfront costs for end users and OEM’s being paid by third party financiers.  

Traditional Financing Includes:

Capital Loan - With a structure similar to a traditional loan, a capital loan will weigh down your balance sheet with the debt required to obtain an asset.

Capital Lease - These are off-balance sheet leases. Equipment must be paid in full over the lifetime of a lease. Following complete payment, the renter becomes the owner.

Operating Lease - An operating lease is similar to a capital lease. However, upon completion of the lease, the machine is returned to the OEM or the leaser.

By offering performance based warranty, equipment financing guarantees manufacturers that the given machine or piece of equipment will function at top-performance for the established leasing period. OEMs will be able to see machine data and if the machine is not operating at the agreed upon levels, IT support and available maintenance technicians will be sent to the machine to fix the issues.

The data that is gathered from the machine over its life-cycle will greatly impact the residual value of that asset.   The machine data will give the OEM the exact number of products produced and machine maintenance while it was under contract.  This is beneficial information for future contract negotiations.  The OEM can say exactly how that machine functioned and how it can be expected to perform   and manufacturers an estimate of how much an asset will be worth when the contract with the end-user is over.    

With this new equipment financing model the payments with productivity are directly connected meaning end-users have more control over their budget by manipulating the machine production rate and the overall machine use.  Ultimately, the opportunities to experiment with new equipment based on this flexible payment structure mitigates the risk for a company and the risk of a bad investment resulting in financial losses.

How Does Traditional Equipment Financing Work?

Typically, a company will evaluate its current needs, and research to find equipment that will best fit company requirements. Perhaps a manufacturer needs to produce plastic parts, so it looks at plastic injection molding equipment.

Finding the proper OEM involves an in-depth comparison machines on the market. Companies must review the inventory, reputation, credibility, expertise, reliability, operating costs, service fees, support, location, and many other factors that separate one OEM from the next.  The initial phase of financing equipment can be complex and time-intensive.

Once the end-user finds the machine they need, they most likely will need to apply for a loan or lease to afford the equipment.  Often, a third party handles the financing; and reviews a business's financial interworkings; such as balance sheets, assets, and sales and revenue.  The goal for the financier is to ensure that the renting company will fulfill the terms of the loan or lease.  

What Are the Short-Comings of Traditional Equipment Financing Options?

Traditional financing works in some cases, but in many situations, it is less than ideal. For financiers, OEMs, and end-users, traditional funding presents a considerable capital cost and is often coupled with uncertainty. For this reason, end-users are usually hesitant to move forward with new technology and new equipment.

Tracking the performance of manufacturing equipment has benefits for the third party financier as well.  This is because the data gathered from the machine that has been sent to the OEM and end-user can also be shared with the financier.  It allows the financier to understand exactly how that machine functioned over its contract.  This is information that most third party financiers are not privy to today.  This greatly increases the residual value of the machine because when another end-user approachers the financier about possibly leasing that machine, the financier is able to produce the exact machine data.  Machine details including the number of times the machine was maintenanced, total number of products produced, the amount of time the machine was running at a required efficiency, and the overall provenance of the machine.  

Traditional financing makes it difficult to market the machinery in secondary markets. Traditional financing also places major burdens on end users in regards to maintenance and servicing. If an expensive piece of equipment breaks, end users may struggle to fix it. Meanwhile, there is no flexibility in regards to payment terms.

The Solution: Usage-based Financing

So is there a reasonable, simple solution to all of the above challenges? In fact, there is! SteamChain is utilizing usage-based financing to allow end-users to lease equipment and pay for that machine according to their production needs.  OEMs and end-user both benefit from a financing agreement like this because it moves more machines into companies who wouldn't originally be able to afford advanced machine likes these, and generates recurring revenue for the OEM.  This also allows the end-user to better scale their products.  If the end-user were to purchase that less advanced machine because they didn't have the upfront capital to afford the better machine, when the company did well the end-user would need to purchase the new machine to scale their product.  

For usage-based financing to work, companies much keep a close eye on machine usage and consumer behaviors. By doing so, financing companies will be able to charge the appropriate amount of the equipment. Detailed records illustrating equipment usage can reduce risks for financiers, knowing the functionality, life expectancy, and financial standing of leased assets.

OEM's, meanwhile, can also use data to monitor usage and to offer advice for increasing productivity. That might mean using current equipment differently, or else offering different equipment options. Meanwhile, OEM's can track performance to identify potential gaps or problems with usage.

Gathering, processing, and monitoring data are quintessential to the equipment financing process and can be accomplished through blockchain systems that will allow each of the three parties to monitor and validate data firmly. With data in-hand, alternative financing, like usage-based financing, provides alternative financing models.

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