Why Lease Equipment?
In deciding how to pay for an equipment acquisition, it is important to remember that…
Use, not ownership, of equipment is what makes money for you!
Ownership only makes sense if the item to be owned has the potential for appreciation in value (real estate, for instance). Since most of the equipment you use in your business loses value rapidly through wear and tear and technological obsolescence, owning it is not a benefit in itself. Most computers, for instance, are essentially worthless on the open market in two years or less.
Because of this factor, leasing has become the accepted form of acquisition for a huge number of companies both large and small. Over all about a third of all equipment acquired in the U.S. each year is acquired on a lease contract – and that figure goes much higher with such things as high technology systems and transportation equipment. Well over $200 billion of equipment was leased in 2006.
Leasing Is Flexible
Leasing allows you to write off the costs of your equipment as you use it, and to trade up to new technology when the time comes.
Moreover, leases can be structured in a variety of ways to meet most any need. This ranges from the fixed term rental without purchase expectation – such as a car rental – to a long term purchase contract – often called “lease to own”. Because of this flexibility, there are many different leasing benefits and just as many reasons why people lease. Here are some of those reasons:
Alternative Use Of Funds
Simply stated, “You’ve got better things to do with your money.”
Business people often think that paying cash is a good way to acquire equipment because it avoids finance charges and interest and results in lower total cash outlay. In reality, paying cash can be the most expensive way to go because tying up funds in equipment may prevent their use in other, more valuable applications.
First of all, liquidity is a critical consideration.
Every company must have cash reserves. It has been said that 75% of small companies are one fire – or one slow paying customer – away from disaster. When it is time to write payroll checks, employees do not want to hear about all the fully paid for equipment the company owns.
Secondly, and perhaps more importantly, every company has opportunities that require cash to implement.
Here are some things you can do with cash which you probably can’t do any other way (not counting building an emergency fund against catastrophic events):
- Be able to bid on and accept large orders and pay for the materials to fulfill them.
- Take quantity buying opportunities on supplies and materials.
- Purchase well priced items at an auction.
- Take cash discounts (2/10 net 30 terms mean a 72% return on investment versus not being able to take the discounts).
- Invest money in research and development of your next generation of products.
- Expand your marketing and sales efforts.
- Hire top talent to grow your company.
- Buy your biggest competitor.
- Invest in appreciating assets such as real estate.
- Take a vacation and recharge your batteries.
Tax Timing Advantages
Qualifying lease payments can be directly expensed (written off) as they occur. This avoids long depreciation schedules. There is also a provision of the tax law (section 179) that allows smaller companies to write off the entire purchase price of the equipment they acquire in the current year, even though they are paying for it on a long term lease/purchase contract.
Direct Tax Expensing
For companies not qualifying for or choosing not to use the provisions of section 179, lease payments are still written off as made, accelerating write-off as compared to purchase and depreciation.
“100% Plus” Financing
Leasing can arrange leases that include everything you need to make your equipment work. This includes software, installation charges, related leasehold improvements and training. This reduces your initial costs even further allowing you to earn profits from your new equipment faster.
Leasing is a well accepted concept. Over 32% of all equipment acquired in the US is acquired under a lease contract. This makes leasing the single largest form of external corporate finance in the country. Over 80% of companies – from small start ups to “Fortune 500” giants – lease some or all of their equipment.
Lease payments can be matched to projected revenues, seasonal cash flow differences or budget limitations. The need to divert cash, or borrow more money from the bank is removed. Our leases can be structured with no payments for up to six months, decreasing payments as equipment becomes less valuable, seasonal fluctuations or other special circumstances.
Financial Reporting Advantages
We can structure leases to meet FASB requirements for “off balance sheet” accounting treatment. Since the total committed lease payments would then show as a footnote rather than as a liability, your overall ratios are improved and there is less risk of lending covenant violations.
Protecting Bank Lines
Banks are excellent for short term needs and should be used that way. An available line of credit is extremely valuable for unforeseen emergencies and should not be tied up to finance equipment. It should also be noted that bank terms on equipment transactions range from “less than perfect” to “downright abusive.” Let your bank do what it does best for them, which is not to finance your equipment.
Avoiding Bank Restrictions
We do not file blanket liens, impose restrictive covenants, include rate escalator clauses or “call anytime” provisions, require compensating balances (a five year 6% loan with a 20% compensating balance requirement actually yields about 16%) or do any of those other nasty little things traditional lenders often do.
Simple and Easy
CFC leases offer simplified documents, an easy one page application, do not require financial statements in most cases and are approved on an accelerated basis – things designed to get you the equipment you need without delay.