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As businesses prepare to compete and grow in a new millennium, many are searching for proven new ways to address their equipment financing challenge. The old ways won't meet today's and tomorrow's needs. The choice for many businesses is clear: equipment leasing.
Equipment Leasing Association research shows that eight out of 10 U.S. companies lease some or all of their equipment. Of all the ways to acquire equipment, leasing is the method most frequently used for all equipment types. In fact, almost any type of equipment can be leased - from fax machines and printing presses, to trucks and bulldozers.
Choosing to lease is a smart way to acquire equipment. There are three ways to acquire equipment – you can choose whichever way fits best with your company's needs.
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Leasing offers numerous advantages over other financing methods:
Tax treatment. The IRS does not consider an operating lease or a true lease to be a purchase, but rather a tax-deductible overhead expense. Therefore, you can deduct the lease payments from your corporate income.
Balance sheet management. Because an operating lease is not considered a long-term debt or liability, it does not appear as debt on your financial statement, thus making you more attractive to traditional lenders when you need them.
100% financing. With leasing, there is very little money down - perhaps only the first and last month's payment is due at the time of the lease. Since a lease does not require a down payment, it is equivalent to 100% financing. That means that you will have more money to invest in revenue-generating activities.
Immediate write-off of the dollars spent. Therefore, the equipment does not have to be depreciated over five to seven years.
Flexibility. As your business grows and your needs change, you can add or upgrade at any point during the lease term through add-on or master leases. If you anticipate growth, be sure to negotiate that option when you structure your lease program. You also have the option to include installation, maintenance and other services, if needed.
Customized solutions. A variety of leasing products is available, allowing you to tailor a program to fit your month-to-month or year-to-year cash flow needs. You are able to customize a program to address your needs and requirements - cash flow, budget, transaction structure, cyclical fluctuations, etc. Some leases allow you, for example, to miss one or more payment without a penalty, an important feature for seasonal businesses.
Asset management. A lease provides the use of equipment for specific periods of time at fixed payments. The lessor assumes and manages the risk of equipment ownership.
Upgraded technology. If the nature of your industry demands that you have the latest technology, a short-term operating lease can help you get the equipment and keep your cash. Lease equipment that you expect to depreciate quickly. Your risk of getting caught with obsolete equipment is lower because you can upgrade or add equipment to meet your ever-changing needs.
Speed. Leasing can allow you to respond quickly to new opportunities with minimal documentation and red tape. Most of the time we will approve your application within one hour and you can have your equipment very quickly.
Lower payments than a Loan.
Improved Cash Forecasting. The lessee knows the amount and number of lease payments so they can accurately forecast the cash requirements for equipment.
Flexible end of term options. Return, renew or purchase.
Tax Benefits. Lessors can pass the tax benefits of ownership on to the lessee in the form of lower monthly payments. If you are in the Alternative Minimum Tax Bracket, at true lease will provide you with an attractive tax benefit.
Improved Earnings. Operating lease accounting provides a lower cost than a capital lease in the early years of a lease.
...that is the question you might be asking. Take a minute and familiarize yourself with this comparison of all three options.
A non-cancelable contract extending over a fixed period of time.
A non-cancelable contract repaid in regular installments.
Using working capital acquisitions
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 multi-million-dollar cogeneration facilities, telecommunications systems, medical equipment (including CAT scanners and MRI imaging), office systems, computers, commercial airliners, and transportation fleets. There is no end to the types of equipment companies lease.
In 1999, it is estimated that approximately $226 billion worth of equipment had been leased. This number represents approximately 30% of all equipment purchases.
A lease is a financing agreement that is structured to meet your organization's special needs. To decide if leasing is the best option in your case, you must first understand those needs and ask yourself these questions:
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 figured 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 its residual. Residuals are built into lease pricing, usually making the lease payments lower than a loan. To compare lease 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.
Leasing companies can offer competitive rates for a number of reasons. Lessors - with their volume purchasing power - can secure attractive financing deals 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've 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. There are several different types of leases (see Glossary of Key Leasing Terms). You and your lessor should consider these factors in determining which is best for you.
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 us.