About Equipment Leasing

1. What Exactly Is Leasing
2. What Kinds Of Businesses Lease Equipment
3. Why Businesses Lease Equipment
4. What Can Be Leased
5. Does It Cost More To Lease
6. How The Lease Process Works
7. Who Qualifies To Lease
8. What Kinds Of Leases Are There
9. Who Do You Lease From
10. What Happens At The End Of The Lease

• Things Your Bank May Not Tell You!

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.

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.

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.

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.

True leases

Sometimes called "TRAC", "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.

Choosing a leasing company
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.

• 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.

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.

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