2008 Industry Analysis

Why should businesses look to utilize leasing now more than ever before?

With new government loan-programs being announced in the next few days, and the $700 billion bail-out bill for Wall Street failing to pass its initial vote in Congress, it is looking like 2009 will be a year of changes for financial markets.

One thing that will not change though is the resilience and adaptability of the lease financing industry to any market climate.

For the most part it is because leasing, like renting, does not require a large capital outlay, so a company only pays for the use of the equipment over a specified time period. Unlike renting however, leasing may offer lower payments through associated tax benefits that the company can take advantage of come tax-time. Also, 100% capitalized leases, the main advantage of leasing, allows the company to conserve its capital reserves while gaining the utility, and in the end ownership, of the new equipment.

During the early 1970’s, the combined effects of inflation and recession forced many businesses to seek out new and more economical financing methods. The ensuing credit crunch was especially hard on a growing small business, and as a result, leasing equipment became an attractive alternative for a growing number of these smaller companies.

In the 80’s, companies were working with more money, and they wanted to shelter those funds from government taxation. Thus those companies used leasing for the associated tax benefits to shelter their assets from exceedingly large government business taxes on small to medium companies.

Then the 90’s rolled around and leasing adapted again. In the early part of the decade, the industry saw a major boom, with the value of goods leased in the United States jumping to $129 billion in 1994. Experts predicted continued major growth, and, though they were not entirely correct, the 90’s ended with leasing leveling off on a major high note. Companies now leased more than ever.

Now, with 2008 drawing to a close, leasing must once again adapt. Almost every US economic expert is predicting some form of inflation in the near future. US banks & lending institutions are already tightening up loan requirements making it more and more difficult to qualify. Businesses, like back in the 70’s, need to seek out the most economical financing method for upcoming projects.

Leasing is a major source of financing for thousands of businesses nationwide, and the diversity of leasing companies, brokerage houses, and major manufacturers are among the many sources of leasing services.

apaladino@allmediacapital.com

The basics... Advantages and Disadvantages of Lease Financing

Advantages and Disadvantages of Lease Financing for Businesses
Originally published: Tuesday, January 18 2005

It has become increasingly more common in recent years for companies to lease equipment. Each leasing agreement needs to be read through carefully to understand the terms and conditions within said lease.

Typically a lease can run anywhere from one to five years. Most equipment necessary in commercial businesses today, including technical equipment, can be leased. Some leases provide an option to then purchase the equipment at substantially less money when at the end of the term of the lease. By leasing equipment, if structured properly, you can maintain your credit availability, as the lease debt does not have to be considered a direct liability on your financial statements. This is advantageous, as it does not limit your ability to borrow from lending sources.

Advantages of lease financing:

• It offers fixed rate financing; you pay at the same rate monthly.
• Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate as when you began the lease, therefore making your dollar stretch farther. (In addition, the lease is not connected to the success of the business. Therefore, no matter how well the business does, the lease rate never changes.)
• There is less upfront cash outlay; you do not need to make large cash payments for the purchase of needed equipment.
• Leasing better utilizes equipment; you lease and pay for equipment only for the time you need it.
• There is typically an option to buy equipment at end of lease term.
• You can keep upgrading; as new equipment becomes available you can upgrade to the latest models each time your lease ends.
• Typically, it is easier to obtain lease financing than loans from commercial lenders.
• It offers potential tax benefits depending on how the lease is structured.

One of the reasons for the popularity of leasing is the steady stream of new and improved technology. By the end of a calendar year, much of your technology will be deemed "dinosaurs." The cost of continually buying new equipment to meet changing and growing business needs can be difficult for most small businesses. For this reason leasing is very advantageous.
Leasing can also help you enhance your status to the lending community by improving your debt-to-equity and earnings-to-fixed assets ratios. There are a variety of ways in which a lease can be structured. This provides greater flexibility so that the lease is structured to best accommodate the individual cash flow requirements of a specific business. For example, you may have balloon payments, step up or step down payments, deferred payments or even seasonal payments.

Disadvantages of lease financing:
Leasing is a preferred means of financing for certain businesses. However it is not for everyone. The type of industry and type of equipment required also need to be considered. Tax implications also need to be compared between leasing and purchasing equipment.

• You have an obligation to continue making payments. Typically, leases may not be terminated before the original term is completed. Therefore, the renter is responsible for paying off the lease. This can pose a major financial problem for the owners of a business experiences a downturn.
• You have no equity until you decide to purchase the equipment at the end of the lease term, at which point the equipment has depreciated significantly.
• Although you are not the owner, you are still responsible for maintaining the equipment as specified by the terms of the lease. Failure to do so can prove costly.

Originally published by "AllBusiness".com: CLICK HERE

Related Topics:
Capital Equipment Leasing, Personal Debt, Commercial Lending Purchasing & Procurement, Lease Agreements, Capital Expenditures, Small Business, Startups

A Word on "Customized Equipment"

"Intangibles." Any leasing professional will tell you there are many intangibles involved in deals as they travel the timeline from inception to conclusion. From the time you send in your application until you finally sign your lease documents, every aspect of a prospective deal will be looked at by the underwriter. Sometimes, even when the numbers make sense, a deal may live or die depeding on one of these "intangibles."

One often seen in equipment leasing is when a customer is looking to acquire Customized or Specialized Equipment. It is one thing when a company is looking for a new 4-head silk screen printer, but when it is a "custom widget maker" made by an "Italian based company" that has 1 distributor and only 5 machines in use nation-wide, the underwriter is well within their rights to ask questions.

Understand this is basic risk management. Pros vs. cons. An underwriter wants the assurance that, in case the customer defaults (or when term of the lease expires), the equipment financed is not be obsolete or unable to be sold off. This alleviates useless items from taking up space in their portfolios. Usually this is nothing major, just a matter of making your "pros" more visible and assuring the underwriter that the equipment you are looking to lease has an actual application for your business. Be aware of your vernacular my friends.

Typically when a piece of equipment is under review, the underwriting source only requires something minor, such as limiting the term to a certain number of months or collecting an advanced payment pre-signing. They will even let you know that it is because you are looking to lease "industry-specific custom-equipment." Just think, if you were dealing with a bank (especially in todays conservative market), it might stick a fork your deal altogether... Even ~if~ the numbers work.

Imagine, what if the survival of your business is dependent upon the acquisition of a new piece of equipment?

Truth is... this is a very easy hot-point to keep from having disastrous reprocussions in the end. As a customer and business owner, relationships are based on trust. Especially with those who are financing major capital expenses. One should be able to trust them well enough with the knowledge of what is being bought and who it is being bought from. As a broker, it is ethically irresponsible (and darn near impossible) to get approval for a money deal if the manufacturer of the "widget maker: is unknown or is a phantom comany. It just does not make basic business sense.

So remember:

• Have full disclosure with your broker. It helps keep the suprises to a minimum. Trust is a good thing.
• Understand the more exclusive or custom your equipment, the more the lease will have to be explained to the underwriter. Don't worry.
• Most times the underwriter just needs a pacifier in order to feel more comfortable. :)
  

~Andy