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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2005

Why equipment leasing? Here are 15 reasons

Something all businesses have in common, regardless of industry, is the need for equipment. The type varies from business to business, but every company faces the challenge of how to pay for the required overhead. Essentially, it’s all about financing.

Annually, $280 billion is spent on equipment leasing in the United States, according to the Equipment Leasing Association of America (ELAA). In the past decade, equipment leasing has increased in popularity for companies looking to acquire new equipment. ELAA also reports that as many as eight out of 10 businesses in the United States choose to lease some or all of their equipment.

A decision to buy or lease equipment requires careful consideration for your clients. Companies need to think about how they will meet the challenges of operations, growth and payment for the required overhead costs.

What exactly is a lease? Simply stated, it is a long-term contractual agreement that grants the user (“lessee”) use of equipment. The lessee makes periodic payments to the owner or provider (“lessor”) of equipment during a specified time period.

To lease or not to lease, that is your clients’ question. There are many advantages to leasing over financing equipment. It allows businesses to:

  1.  Retain capital strength: With new and more-expensive equipment continually appearing in the marketplace, many companies find it more affordable to acquire equipment through leasing. Leasing allows the purchase of equipment and technology needed while spreading affordable payments over time. One of leasing’s advantages is that it requires minimal upfront costs compared to bank loans, which require a substantial down payment — in some cases, as much as 25 percent. Leases usually require only two advance payments at the beginning of the lease. Leasing also allows a business to reserve more capital for other day-to-day expenses.

  2. Find the best use of capital: Leasing can usually finance the soft costs associated with equipment purchases, such as installation, training and software. This enables the best use of capital and helps a company maintain capital strength.

  3. Obtain a critical advantage: For starting or growing businesses, cash often is in short supply. Leasing offers a minimal drain on cash when compared to purchasing. Equipment leases generally range from about $10,000 to several-million dollars. When it comes to leasing, the two most-used application processes for lessees are small- and middle-ticket leases based on the dollar cost for equipment acquired. A small-ticket lease ranges from $10,000 to $100,000. Middle-market leases range from $150,000 to $3 million, and large-ticket leasing extends beyond $3 million.

  4. Move easier and quicker: Leases usually are easier and quicker to finance than bank-based financing, and they also usually come with less red tape. Occasionally, companies cannot maintain the ratios required by traditional lenders and borrow the needed capital from their line of credit. Lessors can often step in and help a business that has been “tenderized by its institutional lender.”

  5. Keep pace with technology: Staying on top of advancements is attractive for a business that relies on cutting-edge technology. Acquiring state-of-the-art equipment and software can give a company a competitive advantage and help it avoid obsolescence. A series of short-term leases on this equipment can be cheaper than buying it.

  6. Improve cash flow: Leasing frees up operating capital, which is one of its prime advantages.

  7. Allow more breathing room: A business can afford more with a lease, whereas it may not be able to afford a purchase. It is able to finance more activities to compete in the marketplace.

  8. Capture a larger portion of the marketplace: Defining the business in the marketplace and in many cases capturing a larger position in the marketplace are enhanced through equipment leasing.

  9. Find better positioning: By gaining new assets and putting new equipment in its employees’ hands, a business can become successful more quickly. Many businesses discover that equipment leasing can place the company in a significantly more-competitive position.

  10. Wield a competitive weapon: When used effectively, leasing can be a competitive weapon as a financial tool for business professionals.

  11. Accelerate growth: Leasing can help companies grow faster in other ways. It allows a company to add equipment more quickly and pay for it over time.

  12. Meet needs: A main reason businesses lease equipment is that leasing meets the needs of so many types and sizes of businesses. Mature, profitable companies may lease equipment to keep bank-credit lines open. Young companies typically lease to conserve cash or because they don’t yet qualify for traditional financing.

  13. Accrue tax savings: For accounting purposes, a lease has historically been treated as an “off-balance sheet” entry and not considered a long-term debt or liability, and has not been recorded on the balance sheet but listed in the footnotes instead. Equipment leasing, when structured properly, may have certain tax-deduction benefits as a business writes off payments as an operating expense.

  14. Receive a quick response: Leasing generally has a quick response. Some leases can be approved within hours through minimal documentation. Small-ticket equipment leases (less than $100,000) often require little documentation and have a quick turnaround time. Leases more than $100,000 require more documentation and more time.

  15. Take advantage of flexibility: Types of equipment vary from business to business, but almost all types of equipment can be leased. Some examples are construction equipment, motor vehicles and trailers, manufacturing machinery and software, office furniture, medical equipment and computers. Installation costs often are included in the lease.

Many businesses suggest following the motto: “If it depreciates, lease it; if it appreciates, buy it.” Savvy business-owners understand the benefits of equipment leasing. They also understand how to use equipment leasing as a tool to gain a competitive advantage.

With more than 30 percent of all equipment acquired in the United States per year done through leasing, accounting for $280 billion spent annually, leasing is gaining more acceptance as a legitimate, useful commercial-financing tool.


 


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