The Power of Equipment Financing for Startups
Digging into a commonly overlooked financing tool for capital intensive startups
The decisions founders make around how to finance their business are as important as any they’ll encounter. In most cases, they’re permanent decisions. Equity is the de facto solution for high growth startups, but it’s a blunt tool. Often, businesses have significant upfront capital expenditures that are required to build their product, distribute it to customers, and generate revenue.
Fundraising headlines highlight the amount of equity a company has raised. In every startup’s fundraising deck, there’s a slide that shows the use of proceeds for the money being raised. When you break down the use of proceeds for that equity, there are often buckets that are better suited for credit. Among those are capital investments like equipment - things like generators, semiconductors, vehicles - that should be financed differently than an initial technology platform buildout or engineering team expansion.
Equipment financing is a tool that’s commonly used among larger public companies, but often overlooked for earlier stage startups. Yet, the impact to startups can be massive. It enables startups to access essential assets without depleting their working capital. The benefit to founders is capital efficiency, dilution savings, and speed to market. Equipment is also an attractive asset to finance for firms like Upper90 as well, based on the ability to generate economic value, useful life, and resale predictability.
In this post we’ll focus on the most scalable ways to finance businesses that have traditional equipment needs, be it a generator in climate tech, industrial equipment in manufacturing, or heavy machinery in construction or agriculture.
Equipment Financing 101
Equipment financing isn’t a new concept. It dates back to Sumeria in 2010 B.C., where farmers rented agricultural equipment from Mesopotamian Priests, with leases etched on clay tablets. Fast forward to the Railroad Era and Industrial Revolution in the US, where equipment loans and leases were frequently used tools to finance trains, railways, barges, and heavy machinery.
Today, equipment financing is as much a method of payment as it is a financing tool for equipment purchases. The small ticket equipment financing and leasing market, defined as transactions less than $250k, accounts for around a third of the $1 trillion in annual equipment and leasing volume in the US. Nearly 80% of the equipment purchased in the US is financed.
There are a number of reasons that companies choose to finance the purchase or lease of equipment. One, which we briefly mentioned above, is to preserve equity capital. Another is to match equipment costs with future cash flows given the significant upfront cash outlay required to purchase said equipment. A third is to maximize tax benefits of equipment through leasing the assets.
The primary products are typically (a) term loans secured by equipment and (b) leases where a business rents equipment from the owner over a fixed period.
Equipment term loans are used specifically for the purchase of equipment. The loan is secured by the underlying equipment and the company repays principal and interest over the term of the loan, typically 3-5 years. The company owns the equipment throughout the life of the loan, and at maturity the lender essentially releases its secured claim on the equipment in return for being paid back its principal and any required interest. Equipment loans help companies finance capital expenditures more efficiently, improve cash flow, and mitigate dilution.
A lease is an agreement between an equipment owner (lessor) and an equipment user (lessee), whereby the lessee makes payments to the lessor for use of the equipment. Unlike the equipment loan, in a lease the equipment is owned by the lessor, and at the end of the lease the lessor retains ownership of the equipment. Often what you see in practice in a commercial equipment lease is a buyout clause in which at the end of the term of the lease the lessee has the right but not obligation to purchase the equipment for a pre-determined or to be determined price.
Why Equipment Financing
Equipment loans and leases help companies with access to capital, equity dilution savings, cash flow optimization, and capital diversification. The structures can be applied in a number of industries, spanning agricultural, construction machinery, materials handling equipment, medical equipment, mining & oilfield machinery, aircraft, ships & boats, railroad equipment, trucks, computers, and software.
Source: ELFA. For illustrative purposes only.
What It Looks Like In Practice
This type of capital can be applied to most assets with predictable economic value, useful life, and resale value. Think vehicles, manufacturing or agricultural equipment, and increasingly IT hardware. Offering creative equipment finance to capital intensive businesses is a core focus area for Upper90 to help founders retain ownership while financing growth more effectively.
For example, a climate technology company building geothermal heat pumps might use equipment financing to fund the purchase and development of their end product. Or a next gen agricultural tech company might use an equipment loan to purchase the farming machinery required to operate. Even alternative manufacturing businesses innovating in areas like carbon-neutral cement and steelmaking have traditional capex requirements, including manufacturing equipment, that can be financed with an equipment loan.
One company we’ve done this with a number of times is Crusoe. We initially started working with them when they were actively building out their Bitcoin mining business and required access to power generation assets, including Waukesha generators. Due to its Bitcoin exposure, more traditional lenders were unwilling to finance the generators. We got excited because:
Generators historically have a long useful life, with these generators lasting up to 30 years.
Wide use-case of applications: generators can be utilized in a variety of oil & gas, power generation and industrial applications.
Robust secondary market: Given the long useful life and wide use cases, there is a robust secondary market in the event it needed to liquidate its collateral.
We quickly saw a longer term partnership opportunity with the team and a firm belief in the business they were building. We’re proud to be debt and equity investors in Crusoe since 2019.
In 2023, Upper90 provided Crusoe a $200M equipment financing facility for its build-out of its cloud compute business. In order for Crusoe to scale its Cloud segment, they needed to purchase a large number of expensive GPUs produced by Nvidia. These GPUs typically have long useful-life and are in high demand across the market today as businesses scale their ability to provide cloud compute services to leading AI/ML companies. We provided a facility that financed the upfront purchase price of these GPUs, enabling Crusoe to grow faster, more efficiently, and with less dilution. We spent time with Crusoe’s Founder & CEO Chase Lochmiller recently to expand on Crusoe’s business and the role credit plays here.
Where Upper90 Fits In
As a hybrid credit fund, Upper90 is positioned well to provide equipment financing to early-stage startups and other high growth businesses that are looking for flexible capital to fund capital intensive equipment needs. Our ethos centers around alignment. We want to partner with ambitious founders building innovative businesses, helping them own more of the business they’re creating.
We’ve been particularly focused on businesses with equipment needs in the following areas:
Climate and sustainability: alternative energy generation, energy storage, carbon capture, and electric vehicles
Digital infrastructure: compute assets, related hardware needs
Agriculture: next generation agricultural production, vertical farming
Manufacturing: sustainable manufacturing, 3D printing, robotic manufacturing
If you’re building a business that has traditional equipment capex requirements and looking to finance growth more efficiently, we’d love to meet you. Feel free to reach out to conor@upper90.io.
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