What Are Soft Costs and Why Do You Care?

  June 13, 2018

  Read Time: 1 MIN 23 SEC

So you’ve won the new bid or have the new production contract in place. Or maybe you made the decision to upgrade your IT infrastructure to create new efficiencies. Either way, equipment purchases that require a healthy chunk of capital are a central component of those strategies. And while you may have planned for the cost of the equipment, often businesses forget to plan for a significant portion of the total equipment expense. We call them soft costs.

Soft costs are everything from installation, warranties, delivery or even assembly in some cases. As equipment becomes more easily customized to meet your company’s unique requirements, more soft costs are often required to get the equipment up and running. And don’t sleep on the financial impact. It can cost up to $10,000 for some deliveries. IT services, installation and engineering adds an average of 40% to every IT purchase over $25,000 on average. Some customized solutions can take as much as a year to be up and running.

These issues can create serious financial issues. Most of the time, soft costs have no real value and therefore add no value to the equipment long-term. They are necessary one-time expenditures to get the equipment running that cannot be transferred upon resale. And that makes most lenders run for the hills. You may enjoy your very low-rate financing for the equipment from a local lender, but when you evaluate the project in total – including soft costs – you could find yourself investing some pretty big money out of pocket to pay for everything. This defeats the purpose of preserving capital through financing. So, all in, the cost of the financing is actually quite a bit higher when you consider the required cash investment for soft costs.

As equipment becomes more easily customized to meet your company’s unique requirements, more soft costs are often required to get the equipment up and running.

The other financial issue is that soft costs typically happen up front – before the revenues start rolling in from your equipment investment. This cash outlay can create severe cash flow burdens when you need cash the most. Ramping up for new business or creating new efficiencies can require more capital on hand to create inventories, hire staff and invest in marketing. Tying up cash during this time for things like installation and delivery can create real challenges to execute your strategic plans.

There is the possibility of a better approach. While some lenders may run from soft costs, others can bring them into the financing arrangement. These lenders have strong specialty in financing equipment and understand more than just the invoice amount. They understand the impact equipment like this can have on your business. And as long as soft costs stay within certain parameters of the total investment, you can fold them into your affordable monthly equipment payment and preserve your cash for more important needs.

At LEAF, we make equipment more affordable. Our customized finance solutions solve real problems – like financing the total equipment investment to preserve your cash.

Section 179 | How to Get the Most Out of the Section 179 Deduction