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Should you buy or finance your LED retrofit?

Issuing time:2017-11-10 00:00

LED lighting uses 75% less energy and lasts 25× longer than incandescent lighting, so it's no surprise that companies across industries are making the switch. While the benefits of upgrading to LED are clear and proven, the upfront cost deters many companies from pursuing a full upgrade. Building owners may struggle to justify an LED retrofit when their facility already has working lights, and lighting is rarely a priority when weighing other capital investments.

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So what's an LED vendor to do? Build a strong case for capital spending to reduce costs and boost profits. There are two ways building owners can upgrade to LED. Each option has its unique advantages and disadvantages that energy managers should explore in each proposal.

Cash purchase. Purchasing LEDs outright is a great option for companies who have cash on hand to pay in full at the time of installation. The greatest advantage of paying cash is avoiding debt or interest. However, an investment this large will likely use funds allocated for other initiatives, and may postpone other projects or erase cash on hand. Although an LED retrofit will return energy savings, savings will not offset the initial investment for a few years.

Equipment financing. This is the industry catch-all term for equipment loans and leases. This is the best option for building owners who do not have the cash on hand for an LED upgrade, and whose focus is capital preservation - securing the upgrade with the lowest upfront cost. Equipment financing enables building owners to pursue an LED retrofit, while maintaining cash for other planned projects or unexpected costs and simultaneously enjoying energy savings.

Equipment financing presents an undeniable win-win scenario: Building owners who use equipment financing preserve cash flow for a rainy day or strategic investment, get the equipment they need, and maximize energy-efficiency savings while simultaneously improving the bottom line. Generally, financed LED retrofit projects are "net cash-flow positive." This means that the upgrade generates monthly savings that are greater than the monthly loan payments.

Put another way, building owners can choose to finance an LED project for $0 down, use someone else's money, and generate immediate positive cash flow in the very first month. By counting the equipment as collateral for the loan or lease, equipment financing offers some of the best interest rates and payment terms for LED upgrades, regardless of a business owner's time in business or credit score.

All of this is music to an LED vendor's ears. LED vendors have long faced an uphill battle in closing deals for commercial spaces, due to the high upfront cost. With automated equipment financing solutions, vendors can quickly summarize the project economics and cash flows for a building owner. This might include cash spent to start realizing improved efficiency, estimated efficiency savings, any applicable rebates or incentives, and instant, online financing quotes.

Equipment vendors should establish cost first, be realistic about future savings, and work with the building owner's finance department when necessary. The result is a "no-brainer LED retrofit."

Creating a strong business case with equipment financing enables vendors to position and sell more cash-flow positive LED projects. For example, consider the owner of a California Chevron gas station who was looking to increase his store sales by providing customers with better illumination of his store and merchandise with new LED lights. While he wanted to realize the energy and maintenance savings of energy-efficient bulbs, the owner did not have the budget for new lighting, as he was saving for an upcoming project.

The vendor, Hi-Def Lighting and Electrical, provided him with an alternative way to pay for the LED upgrade: equipment financing. With competitive terms from Hi-Def and the ability to save cash for his other project, the owner proceeded with a full LED upgrade. This Chevron station is expected to be 58% more efficient and save the owner close to $3000 per year.

Vendors who implement equipment financing capabilities will differentiate themselves from competitors and become a trusted advisor in the LED industry. On the forefront of automation, vendors can make upgrading to LED effortless, ensuring building owners have the best and brightest, without breaking the bank.

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