Everything You Need to Know About Usage-Based Financing
Updated: Dec 6, 2019
If you’re an equipment builder (OEM), then you understand the urgency to sell your machinery and meet those company quotas.
However, almost every opportunity to make a sale comes with some customer friction along the way.
These barriers may arise for multiple reasons, though, the most common reason being your customer’s inability to comply with typical financing agreements that help purchase the equipment outright.
How can you solve these common buying barriers? What other financing options do you have?
If you find yourself asking these questions, then usage-based financing may be the right solution for your business.
What is Usage-Based Financing?
Usage-based financing is a flexible financing agreement that calculates periodic repayment rates by measuring an equipment’s runtime and the number of units it produced.
This form of equipment financing is similar to a traditional financing agreement, but instead of paying a fixed amount every month, repayment is calculated based on the equipment’s usage rate.
In other words, you pay off your financing per every unit of inventory your equipment produces.
This pay per use model is emerging in various industries every year as more customers demand flexible financing solutions.
The biggest takeaway of usage-based financing is that you pay off your financing every time your customer produces.
So if a customer is expected to produce more for a given time period, you’ll pay off your financing quicker, but if they’re expected to produce less, then they’re only obligated to pay back at the rate in which they produce.
Because of this extreme flexibility, usage-based financing tends to poise as the new standard of financing for equipment builders and manufacturers alike.
Who Qualifies for Usage-Based Financing?
Almost any business that buys or sells equipment can leverage the multitude of benefits usage-based financing has to offer.
This includes industries such as automotive, industrial manufacturing, farming, and medical, to name a few.
Qualifying is typically still dependent on having a great credit score and you should be able to clearly demonstrate based on your business operations how this flexible financing will be paid off over the course of the equipment’s useful life.
Any equipment builder who's looking to either offer new financing options for its existing products or looking to expand their market share by providing new customers with more flexible terms.
Any equipment buyer who’s tired of traditional equipment financings and is looking for a performance-based financing option that is more production-focused and less of a financial burden. The typical equipment buyer does not have the means of paying a large investment up front.
Why should OEMs consider usage-based financing?
Depending on the agreement terms, equipment builders prefer usage-based financing for the following reasons:
1. Sell more equipment
OEMs want to adapt to the modern needs of their existing customers and reduce their investment hurdles to purchase equipment. As a result, you position your company to increase revenues and establish better relationships with your customers.
2. Revamp current business model
Equipment builders want to modify their business model to keep up with the latest trends by offering pay per use services.
3. Provide more financing options to acquire new market segments
Offering attractive forms of financing expands their business’s reach.
Pay per use installments increases their probability of selling more equipment to those buyers who cannot depend on traditional financing options.
4. Upsell customers through longer-term service agreements
Equipment builders can increase new revenue sources by creating contractual terms that require customers to utilize their equipment services over their machine’s useful life.
Why do your customers prefer usage-based financing?
Equipment buyers typically engage in usage-based financing for the following reasons.
1. Reduced upfront investment
Depending on the agreement terms, manufacturers require zero to little initial capital upfront, thus removing their investment hurdle to begin production.
2. Manageable payment options
Usage-based payments are not designed with rigid payment structures, instead, they’re designed to optimize cash flow. Your customer no longer stresses over losing money during equipment setup time, seasonal trends, or economic downturns since they’re obligated to pay based on their unit economics.
3. Switch from CAPX to OPEX and transparent cost structure
Manufacturers unlock tax and balance sheet benefits by having a transparent financing cost structure since they’re able to track and visualize the equipment’s performance.
Pay per use payments enable better cash flow optimization and allow the desirable switch from CAPX to OPEX.
4. Earn more by maximizing equipment’s performance
Manufacturers can take advantage of the equipment's useful life and revenue-generating capabilities.
With usage-based financing, a manufacturer is given a minimum and maximum parameter that if surpassed, enables an economic advantage.
For example, if your maximum threshold is based on production output of 10,000 units but the manufacturer actually produces 12,000 units, then their financing cost per unit is reduced.
Which option is best for you?
Now, the big question is whether or not you want to sell more equipment by adopting usage-based financing.
To find out, we’ve created some questions you may consider asking yourself before deciding:
1. Am I abandoning new revenue streams by limiting my current financing options?
If you keep rejecting new or existing customers due to your current financing options, then you may want to consider usage-based financing.
If your customers aren’t able to offer a huge down payment or monthly fixed installments, then this flexible payment option may be more appropriate for your line of business to capture missed sales opportunities.
2. Am I working in a competitive market?
If you find yourself constantly competing with others just to sell more equipment, then you may want to consider upgrading your current offerings.
Consider listening to your customers to see what it is they want from you to improve their buying experience.
3. Do I want to catch up on the latest industry trends?
Offering usage-based financing is the first step into a pay per use model, allowing you to test all the various market demands for new trends in your business.
A 2018 study conducted by bitkom reveals that 37 percent of all OEMs develop products and services for business models with usage-based compensation.
4. Do I have any data infrastructure in place?
If you’re currently leveraging equipment-usage data to better your business intelligence than these new forms of financing may align in the same direction as your future revenue goals.
How to find usage-based equipment financiers?
To find the best usage-based companies, a good old Google search consisting of “Usage-based Financing” may put you in contact with a local lending service.
You can also reach out to the linx4 team where we can help you get started with valuing your assets through a pay per use model, put you in touch with the right financial institutions to secure the agreement, and manage your data infrastructure.
In general, it’s best to consider usage-based financing through a situational lens as every use-case is different based on the equipment and the potential buyer involved.
Reap the benefits of selling more equipment with usage-based financing. If your customers don't want to pay or simply can’t forge the full amount upfront, then maybe it's best to start looking for other ways to diversify your offering.