Leasing is an increasingly popular, cost-effective means of acquiring industrial equipment. Research done by the Equipment Leasing Association (ELA) shows that eight out of 10 U.S. companies lease some or all of their equipment. In fact, almost any type of equipment can be leased‹from fax machines and stamping presses to trucks and bulldozers. To decide whether leasing is the best option in your case, you must first understand your needs and ask these questions:

• How does this equipment make your business more competitive?
• What is the most efficient use of your cash?
• How long will you use the equipment?
• What will your equipment needs be in the future?
• What are your plans for growth?

Do the Math. Obviously, you will want to factor the cost of leasing into your evaluation. Generally, the cost of leasing is comparable to those of other financing options when looking at the whole transaction. It is important to point out that leases are not loans. As a result, their costs are calculated differently from those of loans. Leases take into account that the equipment is worth something at the end of the lease term. This is called the residual value. Residuals are built into lease pricing, usually making the lease payments lower than a loan. To compare leased products, it is better to compare monthly payments than to try to compare loan interest rates with lease rates. On a cost-of-capital basis, leasing may be the least expensive option.

Some leasing companies can offer competitive rates for a number of reasons. Lessors‹with their close ties to equipment manufacturers‹may offer attractive financing and pass along the savings to the lessee. The lessor also is better able to take advantage of the deduction for depreciation expense that comes with ownership.

Once you have completed your evaluation and decided to lease your next equipment acquisition, the first step is to select the type of lease that fits your needs. You also will need to determine what happens at the end of the lease. Your options can include returning the equipment to the lessor, purchasing the equipment at fair market value or a nominal fixed price, or renewing your lease. To design a leasing plan that best meets your needs, you need to understand your options. Discuss any questions or concerns you have with your lessor.

What Should I Look For in a Lessor? Your choice of a financing company is an important one. You will want to study the company carefully, evaluating how it can meet your financial and strategic objectives and ensuring that you get the best possible leasing program.

The key to success is selecting a financing partner with whom you are comfortable. If all goes well, your lessor will be with you for a long time, so the choice is an important one. Pricing is always a factor, but the relationship should be a primary consideration.

Why is Leasing Good Business? You rely on equipment every day to operate and grow your business. But the value of that equipment comes from using it, not owning it. By leasing, you transfer the uncertainties and risks of equipment ownership to the lessor, which allows you to concentrate on using that equipment as a productive part of your business.

The Bottom Line. Is financing high on the list of things that keep you awake at night? If so, you are certainly not alone. Identifying flexible financing options is an ever-present challenge for most machine tool businesses. For many‹80 percent of all U.S. businesses, to be exact‹leasing is part of the solution.

Leasing can help your financial picture. It offers many advantages over other financing options‹from flexibility and convenience to a clean balance sheet and a competitive edge.

Equipment Leasing Is it right for your company?

Loan: A loan requires the end user to invest a down payment in the equipment. The loan finances the remaining amount.
Lease: A lease requires no down payment and finances only the value of the equipment expected to be depleted during the lease term. The lessee usually has an option to buy the equipment for its remaining value at the end of the lease term.

Loan: A loan usually requires the borrower to pledge other assets for collateral.
Lease: The leased equipment itself is usually all that is needed to secure a lease transaction.

Loan: A loan usually requires two expenditures during the first payment period: a down payment at the beginning and a loan payment at the end.
Lease: A lease requires only a lease payment at the beginning of the first payment period, which is usually much lower than a down payment.

Loan: The end user bears all the risk of equipment devaluation because of new technology.
Lease: The end user transfers all risk of obsolescence to the lessor, as there is no obligation to own the equipment at the end of the lease.

Loan: End users may claim a tax deduction for a portion of the loan payment as interest and for depreciation, which is tied to IRS depreciation schedules.
Lease: When leases are structured as true leases, the end user may claim the entire lease payment as a tax deduction. The equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules, resulting in larger tax deductions each year. The deduction is also the same every year, which simplifies budgeting (equipment financed with a conditional sale lease is treated the same as owned equipment).

Loan: Financial Accounting Standards require owned equipment to appear as an asset with a corresponding liability on the balance sheet.
Lease: Leased assets are expensed when the lease is an operating lease. Such assets do not appear on the balance sheet, which can improve financial ratios.

Loan: A larger portion of the financial obligation is paid in today's more expensive dollars.
Lease: More of the cash flow, especially the option to purchase the equipment, occurs later in the lease term when inflation makes dollars cheaper.

Top Ten Benefits of Leasing

1. Purchasing power. Lease financing allows the lessee to acquire more and/or higher-end equipment.

2. Balance sheet management. Certain types of leases help the lessee better manage the balance sheet and improve its overall financial picture by conserving operating capital and freeing up working capital and bank credit lines.

3. One hundred percent financing. With leasing, there is no down payment. The term of the lease can be matched to the useful life of the equipment.

4. Asset management. A lease provides the use of equipment for a specific period of time at fixed payments. It assumes and manages the risks of equipment ownership.

5. Service additions. Many lessees choose to structure their leases to include repairs and maintenance, if needed.

6. Tax treatment. Leasing offers the option of deducting 100 percent of the lease payment as a business expense.

7. Upgraded technology. Leasing lets companies upgrade as technology changes.

8. Specialized assistance. Lessors are specialists in equipment leasing and financing and understand capital equipment markets.

9. Flexibility. There are many types of leasing products available, allowing the lessee to customize a program to address needs and requirements‹cash flow, budget, transaction structure, and so on.

10. Proven equipment-financing option. More than 30 percent of all capital equipment in the United States is acquired through leasing. In fact, eight out of ten companies lease their equipment.

Source: Competitive Mold Maker, Volume 6, Number 1
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