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What Kinds Of Businesses Lease Equipment Why Businesses Lease Equipment Doesn't It Cost More To Lease? What Kinds Of Leases Are There What's Fair Market Value (FMV) What Happens At The End Of The Lease ....and Two Things The Banker May Not Mention!
An equipment lease is a contract for
the use of a specific piece, (or multiple pieces of), equipment or
furnishings for a specific period of time and for specific lease (rental)
payments agreed upon in advance. The lessor is the owner of the leased
equipment and makes the initial cash investment for its purchase. The lessee
is the user of the equipment and gets all the benefits of its use, just as
if they owned it. Leasing lets you finance the use, without having to
finance the purchase
What Kinds Of Businesses
Lease Equipment? All kinds and sizes of businesses;
from the largest multinational companies and professional practices, to "mom
'n pop" businesses and individual proprietors; use equipment leasing as a
way of acquiring the use of the tools or furnishings they need to be
productive and profitable. According to industry and government
statistics, 80% of all businesses lease at least some of what they use; an
estimated $147 billion dollars worth of equipment in 1995. Any growing
business can benefit from using equipment leasing. It provides a practical
way to stay abreast of the latest trends and use the newest, most productive
equipment without draining valuable equity cash from the business or tying
up important bank lines of credit. Tying up cash in fixed assets can
severely restrict the ability to move quickly on other opportunities.
Why Businesses Lease Equipment
There are as many reasons for leasing
equipment as there are business who do, but some of the most often cited by
those businesses are:
Make money using; not owning; new
equipment
Remember, your business makes money by
using your equipment, not by owning it; you don't have to own the electric
company to benefit from electricity. A plan which lets you defray, delay
or diminish costs by using someone else's equipment may be more practical
than buying your own.
Spreading cost to future owners
As a business owner or partner,
anything you buy, you pay for. Anything you lease, future partners or
owners will help you pay for. Law firms, medical practices and other
businesses that expect to grow and add additional owners or partners in
the regular course of their business find equipment leasing is an ideal
way to pass on an appropriate portion of the cost of new assets to those
who will benefit from their use in the future.
Use cash for other reasons
Fast growing, successful businesses
recognize the need to move quickly on income opportunities. They want
their cash and bank credit lines available and not tied up in depreciating
assets.
Faster write off
A properly written lease may offer you
the fastest possible way to write off the costs of using new equipment.
This lets you use money you would have paid in taxes to help keep your
business modern and competitive.
Hedge against obsolescence
Also, by writing it off faster, you
avoid making long term commitments to rapidly changing technology. Under
the current MACRS, (Modified Accelerated Cost Recovery System),
depreciation schedules, it may take you 6 or 8 years to fully depreciate
the purchase of technology you may only use for 3 years. Computers,
telecommunication systems, and medical equipment are all good examples.
Cash Flow
Equipment Leasing generally requires
the least amount of up front cash to get new equipment in place and
working for you. Just as you wouldn't pay a new employee their lifetime
wages in advance, it's not necessary to pay up front for all the expected
utility and benefit of new equipment or furnishings. Leasing them let's
you pay for them as they work for your business An amazing variety of things can be
leased. Basically, anything that can be considered personal property, not
permanently attached to real estate, can be leased. A good rule of thumb is;
if it can have the same use somewhere else and can be moved there, it can be
leased. Some of the most frequently leased items are:
Doesn't It Cost More To Lease? Leasing is a practical way to use new
equipment and compares favorably with other forms of financing, costing you
about the same. That, of course, is no coincidence; the marketplace demands
it and leasing rates are set accordingly. Leasing companies look at what typical
bank loan rates are and then factor in your interest deduction and
depreciation to arrive at what a loan really costs you; your net after tax
cost. They then set their rates to be competitive and work backwards,
factoring in the greater deductions offered by the lease, to arrive at lease
payments that will give you the same approximate net cost. It's probably much like you analyze
and set your own pricing, you have to be competitive. With 80% of all
businesses leasing, it can't cost much more; and with that size market they
don't need to charge much less. Anyone who says that leasing always
costs more is just as wrong as anyone who says it always costs less.
The truth is it costs you about the
same to lease equipment as it might to buy it. Businesses lease for cash
flow and other reasons as cited above. What's the interest rate? Because you're not borrowing any money
when you lease equipment, there's no interest rate on the lease like there
would be on a bank loan. You can, however compare the cost to lease with the
cost of a loan. Which one costs more? To accurately answer that question you
have to look at your net-after-tax-cost. The "list price" may not tell the
whole story. Just as a $610 television in an electronics store appears to
cost more than the $600 model sitting beside it; if there's a $10 rebate on
it, then its net cost to you is the same. Not looking at the total
transaction; the net cost; might "cost" you the choice you really want to
make. Comparing leasing and purchasing is very similar. Call us to request and review a sample
Lease vs. Purchase cost analysis tailored for your specific business needs.
There's no obligation, and it will give you a clearer picture of the true
costs and choices available to you. Applications through approval The equipment leasing process is
pretty simple and straightforward. You select the equipment or furnishing
you need from the supplier of your choice, then make an application to the
leasing company describing what you want and where and how it will be used.
The leasing company wants to know that you are able and willing to make your
lease payments and so they do a standard credit check much like a bank would
do. Like a bank, they'll generally require
the personal guarantees of the owners for newer businesses and closely held
corporations. Documentation and ordering
equipment Once the lease is approved, they'll
ask the owner or president of the business to sign the lease agreement.
Depending on the type of lease and the amount of leased equipment, the lease
agreement may include one or more schedules listing the leased equipment and
the terms. Acceptance and lease beginning Once the lease is signed and received
by the leasing company with the appropriate initial payment and security
deposit, the leasing company issues a purchase order to the equipment
supplier you've chosen. When the equipment is acceptably delivered to you,
they'll ask for a delivery and acceptance form to be signed. The equipment
supplier is paid and your lease actually begins at that point. Credit Qualifications Requirements
vary from leasing company to leasing company but generally an established
business with a good credit record can lease equipment. Most leasing
companies would like you to have been in business for two or more years and
have the same business banking account for that time. They'll ask the exact
legal name of the business, when it was started and who owns it. They'll
check the bank reference for any history of returned checks and several
trade references for promptness of payments. Depending on the size or length
of the lease or the age of your business they may need financial statements
for the business, the owners, or both. Personal Guarantees Personal guarantees are generally
required from the owners of closely held corporations or newer businesses.
Even when not required, the most favorably leasing terms are always reserved
for leases that are guaranteed. The guarantee serves a dual purpose.
Leasing companies generally do not do
an in-depth analysis of your business plan, market potential or competitive
position and they allow you to select the equipment and supplier you feel
can best satisfy your needs. Leases also do not generally include the
restrictive covenants and periodic management reviews typical in bank loan
agreements. The leasing company relies largely, instead, on the commitment
of the owners as an indication of the confidence the owners have in the
business. The personal guarantee indicates to
the leasing credit manager a high degree of confidence by the owners in the
future of the business and it's ability to meet its obligations. In a case of a defaulted lease, the
guarantee gives the leasing company the additional security that a bank
typically has through a blanket type lien on all the assets of the business.
Since the leasing company has only the specific equipment on the lease, the
guarantee demonstrates the owners willingness to provide the lessor with a
comparable level of security. New businesses Though most leasing companies prefer
to work with established businesses, equipment leases can be done for new
businesses, too. For new businesses, the financial strength of the owners
will be of paramount importance and their personal guarantees will always be
required. Additionally, the leasing company may ask to review business
plans, pro forma financial statements, supplier contracts or other pertinent
information. They'll frequently request resumes from the owners to show
relevant prior experience
What Kinds Of Leases Are There? Equipment leases can be written for a
variety of terms but typically range from 12 to 60 months. The most popular
term is 36 months. Most leases are monthly but quarterly and annual payment
leases are also done. Also available are step payments,
wherein the lease payments start out low and increase each year; delayed
payments, wherein the equipment can be installed and used for several months
before the lease payments begin; seasonal payments, wherein the payment
schedule can be set to match the seasonal cash flow of the business; and a
variety of other customized terms. All of the above leases will fall into
one of these broad categories: True leases Sometimes called "tax" or "FMV"
leases, these are designed to meet IRS tax guideline definitions of a lease
and may offer you the fastest way to "write-off" the use of new equipment.
Leased equipment may be re-leased, purchased, returned or traded in at the
end of the lease. Abandonment leases Frequently called "$1-Buy-Out" leases,
these transfer ownership for a token sum at the end of the lease. They're
basically a sales finance type contract. They offer the convenience of
leasing for those not needing the full tax deductibility of their lease
payments. Operating leases This type of lease can be designed to
meet accounting standards for off-balance sheet financing according to FASB
(Financial Accounting Standards Board) rules. Sale/Leasebacks In this type of lease, the lessor
purchases the leased equipment from the lessee who leases it back from the
lessor and continues to use it. It's an effective way to free up working
capital which may be tied up in fixed assets. Equipment leases are written by a
variety of lessors including; individuals, banks, financial services firms
and local and national independent leasing companies. Sometimes wealthy
individuals will provide leasing in order to take advantage of the tax
breaks available to lessors. Usually these leases are arranged through
parties who already know each other or through independent brokers or
agents. In order for the lessor to benefit from the tax breaks, however, it
must be an arms length transaction, that is one in which the lessor has no
interest in or direct connection to the lessee. Local and national commercial banks
frequently have leasing departments. Bank leasing companies can offer
competitive pricing but generally restrict their leasing to existing
customers of the bank. The bank may already have the necessary financial
information about the lessee to process the lease request. Many bank leasing
companies are not interested in individual lease transactions less than a
hundred thousand dollars. Some other financial services firms,
such as insurance companies, commercial finance companies, and investment
companies also offer equipment leasing services. Frequently their programs
are specialized, focusing on limited groups of prospective lessees or
specific equipment types. Many equipment manufacturers also have
captive leasing companies offering leases on the equipment they make.
Independent equipment leasing companies offer a wide variety of services
depending on their size and area of focus. By virtue of being local they may
be most responsive to the specific needs of the customers in their areas.
Choosing the right leasing company is
both important and difficult. Your best value in an equipment lease will
always be the company most interested in and able to handle your specific
needs; and that can vary from lease to lease depending on what you're
leasing and the terms you're requesting. Because of the number and diversity
of companies, however, it's hard to know who that will be for any given
lease transaction. A well established independent
agent/broker keeps abreast of all the companies and what their particular
specialties or interests are at any given time. Working much like an
independent insurance agent, the leasing agent may survey a number of
different companies before presenting you with the best opportunities among
them. Because working through independent agents relieves the leasing
companies of the expense of a field sales force or branch offices, many are
able to offer the most competitive plans this way.
What Happens At The End Of
The Lease? What happens at the end of your
equipment lease is up to you. You may make that decision at the beginning by
the type of lease you choose or, more likely, you'll want to choose a lease
that allows you the flexibility of waiting until the end of the lease to
decide. Generally it will be one of these choices: You may return the equipment at the
end of the lease with no further obligation. Assuming the equipment is in
normal working condition, your security deposit will be refunded to you.
You may re-lease the equipment. Many
leases offer annual or monthly renewals at re-negotiated lease payments.
Because the leasing company has already gotten a good deal of their
investment back, you can generally look for drastically reduced lease
payments. You may trade in or upgrade the
equipment for a lease on newer equipment. In this way you may effectively
get the value of a trade in on equipment you didn't even own. You may purchase the leased equipment.
In the case of the so called "$1-Buy-Out" lease, you'll take ownership for
$1.00. On true, tax type leases, the purchase
price is negotiated between you and the leasing company. Sometimes an
independent appraiser can be called in to help establish a "Fair MarketValue".
Frequently this is pre-estimated at 10% of the equipment's original price.
Lessees who keep in mind that the leasing company doesn't want to end up
with the equipment at the end of the lease generally are able to negotiate
the most favorable purchase options.
2 Things Your Banker May
Not Tell You! Leasing keeps your credit line
available It comes as an untimely surprise to
many business people when the available cash they've been counting on
through their bank credit line is reduced by the amount of equipment leases
they've done with the bank's leasing department. Because commercial credit
and leasing are frequently different departments within the bank, it's easy
to assume that the commitments made by each are separate and cumulative.
That's rarely the case. That's also
increasingly why successful money managers plan ahead and establish
multiple, unrelated credit sources, turning to independent, non-bank leasing
companies for their equipment needs. Your bank has a credit limit that
they'll extend to you and typically whatever you do with them counts towards
it whether it's short term cash borrowing or long term leasing. If you want
to be sure to have cash available quickly when you need it, you won't want
to tie that credit line up in leasing fixed assets. Turn to independent
leasing specialists. That's all they do. Keep your money in the bank.
Compensating balances increase
interest cost Many businesses are lured by seemingly
unbeatable rates to bank leasing plans as part of an overall banking plan.
But if any part of that plan includes minimum or compensating balances in
any other account, it's may not be as good as it seems. The promise of any
kind of financing at prime rate is always flattering. But for a $50,000
package with as little as $2,000 required to be kept in any related account,
the actual rate can be as much as 2% over prime! Banks play an important role in
financing your growth but it always pays to ask questions and shop around.
For equipment leasing, turn to the specialists. Why should I lease? Leasing offers convenience and
flexibility. Leasing will not deplete financial resources - as paying cash
will. Leasing offers 100% financing - unlike a bank loan that will often
require a large down payment. There are also tax benefits to leasing that
will usually save you money. How is leasing different from renting? While there are several differences
between the two, leasing gives you added flexibility by giving you the
option to purchase the equipment, return it, or renew the lease. Leasing
allows lower payments and longer terms that enable most businesses to have
the equipment pay for itself. Can I get the brand of equipment I
want? Yes, because the equipment is obtained
from the vendor of your choice and you negotiate the best price. This allows
you to obtain the equipment that is right for your company, at the right
price. Can I lease computer software? We do have programs where it is
possible to lease 100% software or Software in combination with other
equipment. It is also possible to lease a complete Website or digital
scanning systems. How long of a term can I get? 36 to 60 months for most equipment.
Depending on your business and your equipment needs, terms from 12 to 84
months or more are available. Are payment options flexible? Yes, we understand that not every
business has the same operating schedule or conditions. Seasonal businesses,
for instance, may choose to make most of their payments during the
open-seasons. When will my lease payments begin? Regular payments will be scheduled to
begin after you have received and approved of the equipment, or entered an
order for special equipment |
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