Your loaned equipment is either making you money or costing you money. Unfortunately, most business owners can not say with certainty which it is!
The first step to determining your profit or loss on loaned equipment is return on investment. You should be recouping at least your equipment cost at the individual customer level, either in a monthly fee paid by the customer or extra margin charged in the customer’s product price.
Extra margin is tricky when sales personnel are commissioned on margin. If you don’t subtract out the premium being charged for the loaned equipment, you automatically encourage salesmen to loan equipment so they can earn higher commission on each account. That may not be good economics for your company.
The other problem with margin paybacks occurs when a customer says they will purchase a certain volume or quantity, then actually purchases less or fewer than promised. Clever business owners cover this contingency with surcharges based upon volume thresholds. Really clever business owners make sure the surcharges earn them profit above the equipment cost.
Customer monitoring also cures the biggest loaned equipment sin — forgetting the equipment is even there.
Loan agreements are vital not only for keeping track of equipment but also for protecting your company in the event of equipment failure, spills, misuse or damage. Your loan agreement should spell out exactly who is responsible for what. From the profitability side, equipment maintenance and service can become a profit center for your company if written into the agreement.
Documenting the condition of your equipment at the time of installation at the customer’s site is prudent. The easiest method is simply to photograph the equipment and keep that photo with the loan or lease agreement. This documentation is also handy for insurance purposes.
Ideally, you want to be in the equipment leasing business, not the equipment loaning business. Consider designing a lease which rewards large volume buyers with reduced lease payments according to a sliding volume schedule. The more product they buy from you, the lower their lease payment.
Knowing the exact location of each piece of equipment is especially useful for tax purposes. If you loan equipment in more than one county, parish or township and each has separate tax rates, you need to know how much equipment is located in each tax zone. If your bulk plant is located in a higher tax zone than some of your loaned equipment, you can save money every year by having accurate location information.
How you track equipment warranties can also have an impact on your bottom line. Who in your company tracks this information on your loaned equipment? If you are like many smaller family businesses, the answer is “Well, no one really does.” If that’s the case, you may be paying for repairs that should have been covered under warranty, losing money unnecessarily.
Finally, loaned equipment is a credit risk, especially on easily movable pieces. Sales personnel often forget about credit limits when putting together customer loaned equipment deals. Credit limits should be taken into consideration before your equipment is out the door. For instance, if your credit manager determines a new dealer deserves a $25,000 credit limit based upon his financial condition, you need to think twice before putting $50,000 worth of equipment on his site that could disappear!
