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Leasing is flexible. Companies have different needs, different
cash flow patterns, different - sometime irregular - streams of income.
For example, startup companies typically are characterized by little
cash and limited debt lines. |
Mature companies might have other needs:
to keep debt lines free, to comply with debt covenants, and to avoid
committing to equipment that may quickly become obsolete. Therefore,
your business conditions - cash flow, specific equipment needs, and
tax situation - may help define the terms of your lease.
Moreover, a lease provides the use of equipment for specific
periods of time at fixed rental payments. Therefore, leasing allows
you to be more flexible in the management of your equipment.
Leasing is practical. 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.
Leasing is cost effective. Equipment is costly and some of the
costs are unexpected. When you lease, your risk of getting caught
with obsolete equipment is lower because you can upgrade or add equipment
to best meet your needs.
Further, your equipment needs can change over time due to changes
in your company, such as diversification. Leasing allows you to stay
on the cutting edge of technology. Sophisticated business managers
have learned that the primary benefits of higher productivity and
profit come from the use of equipment, not owning it.
Leasing has possible tax advantages, please check with your accountant.
Rather than deal with depreciation schedules and Alternative Minimum
Tax (AMT) problems, you, the lessee, maybe able to simply make the
lease payment and deduct it as a business expense. Leasing helps conserve
your operating capital.
Leasing keeps your lines of credit open. You don't tie up your
cash in equity. Also, you avoid costly down payments. With other advantages
such as off-balance sheet financing, leasing helps you better manage
your balance sheet. |
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Lessees
vary widely from small, one-person operations to Fortune 100 corporations.
And the kinds of equipment being leased are just as diverse.
Transactions range from a few thousand dollars worth of equipment
(such as fax machines) to multimillion-dollar cogeneration facilities,
telecommunications systems, medical equipment (including CAT scanners
and MRI imaging), office systems, computers, commercial aircraft,
and transportation fleets. There is no end to the types of equipment
companies lease.
In 1992, it is estimated that approximately $129 billion worth of
equipment will have been leased.
Two Common types of leases are operating leases and finance
leases.
With an operating lease, the term is shorter than the expected useful
life of the equipment Rental payments do not cover the equipment cost
for the lessor during the initial lease term. This type of lease is
popular for high-tech equipment, because shorter-term leases help
equipment users stay ahead of equipment obsolescence. The lessor uses
its equipment remarketing expertise to subsequently find other users
for the returned equipment; something the typical equipment user does
not have time or ability to do.
With a finance lease, the term is longer, more nearly covering
the useful life of the equipment Rentals tend to be lower because
of the longer term and less residual value risk.
From an accounting standpoint, an operating lease is the simplest
type of lease for you to account for because you only expense rentals;
there is no requirement to add the asset to the balance sheet, as
long as the footnotes to the financial statements indicate the amount
of your lease rental obligations.
Another lease product you may find beneficial is the sale-leaseback:
You purchase the equipment you need and use it for a period of time
before selling it to a lessor. After selling the equipment, you then
lease the equipment. This is another way to free up your operating
capital.
On smaller equipment leases worth thousands of dollars, leases tend
to be more standardized. Above that cost range - several hundred thousand
into the millions - variations appear more frequently. A leveraged
lease on a big-ticket acquisition such as an airplane may include
several customized provisions and options that would not appear in
a typical lease for a smaller amount. Therefore, flexibility is a
product of the size of the lease. |
You
may ask, "Why should I lease equipment rather than take a bank loan?"
For one thing, leasing allows you to keep your bank lines of credit
open. In addition, since leasing companies assume there will be a
residual value in the equipment at the end of the lease, they can
offer lower rental payments, equaling a cash savings to you.
Finally, some types of term debt can interfere with your company's
future financial structure; this does not occur with leasing. The
Financial Accounting Standards Board (FASB) considers lease rental
payments as an expense, not a debt, under many lease agreements. A
key advantage of leasing is that it permits 100 percent financing,
and the term of the lease can be matched with the useful life of the
equipment.
Therefore, if cash flow is a problem, leasing can help your company
avoid down payments and keep scheduled payments low by stretching
out repayment terms. Moreover, as your business grows, bank lines
of credit and your own cash are still available to support increases
in your company's working capital requirements. |
There are
four basic types of leasing companies:
- Banks, or
bank-affiliated firms.
- Captive leasing
companies - subsidiaries of equipment manufacturers, leasing their
parent's products.
- Independent
leasing companies, whether small and specialized or large and
diversified.
Others, such as investment bankers, and independent brokers/packagers
who bring the parties of a lease together.
Over 850
equipment leasing companies belong to the Equipment Leasing Association
of America (ELA), which was founded in 1961. ELA members agree to
follow the association's Cede of Fair Business Practices, which
advocates confidentiality regarding the lessee's financial information
as well as proper disclosure to the lessee of all relevant information
regarding the terms and conditions of the lease. Anyone may obtain
a copy of the code from ELA's Arlington, Virginia headquarters.
If you would
like more information about Focus Bank's lease program,
please contact us online. Bankers, if you are considering the addition of a lease
department in your facility, we invite you to visit BancLease - a lease consulting service for bankers. |
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