Business Equipment Leasing - Overview & Tips
by Kenneth E. Bentsen Jr.
Equipment leasing is a common form of finance for small businesses and a useful tool for them to acquire the means of production to build and grow their companies. According to a recently conducted survey of U.S. Small Business Administration (SBA) 2006 State Small Business winners, 83% currently lease equipment.
In the decision-making process of whether to lease to acquire new equipment, businesses will want to consider the numerous benefits leasing offers. Among the SBA State Small Business winners surveyed, increased cash flow was the top perceived benefit with 50% of the respondents selecting this attribute. No down payment and maintenance options tied as the second highest perceived benefits with 39% of respondents noting each of these attributes. Thirty-three percent cited the ability to have the latest equipment.
Noting how equipment leasing has helped in building her firm’s success, Darlene Miller, president and chief executive officer of Permac Industries and Minnesota Small Business Person of the Year from Burnsville, MN, says, “With leasing, we very seldom need any down payment so it is easy to start making a profit with the equipment right away. With our growth plans of a minimum of 15% per year—and we currently are over 18%—we need the flexibility of leasing equipment as we need it to keep up with our growth.”
The benefits of leasing are one aspect of the decision to lease. Kory Brockman, vice president of finance, Wisconsin Aluminum Foundry Company, Inc., the Wisconsin Small Business winner from Manitowoc, Wisc., offers the factors he considers in making equipment procurement decisions:
* Expected useful life of capital equipment.
* Technology trends of capital equipment (i.e changing rapidly vs. stable).
* Tax impact of purchase vs. lease.
* Maintainability of capital equipment—expertise in-house.
* Need for service agreement.
* Current and future cash flow expectations.
* Lease financing rates vs. long-term secured debt interest rates.
Noting historically low interest rates and federal and state tax incentives which led his firm to invest in equipment rather than lease in the last few years, Brockman says, “As interest rates rise, and existing technology is improved, leasing agreements could become a more desirable financing vehicle for Wisconsin Aluminum Foundry. We currently utilize leasing agreements on computer-based technology almost exclusively.”
The top categories of leased equipment among the SBA state small business winners responding to ELA’s survey were office equipment (39%), computers and industrial/manufacturing (33% each). Other reported category winners leased included trucks and trailers, materials handling, and printing and publishing equipment.
The range of equipment types you can lease—from computers and office equipment to inventory and heavy manufacturing machinery—and the types of leases, from short-term to longer term, make leasing a flexible, convenient option for acquiring the equipment you need to operate and grow your business.
Winners’ Tips
Among Miller’s practical tips for small businesses making leasing decisions are to make sure the leasing company you work with is a reliable source and if possible stay within your own state. She emphasizes the importance shopping around for rate comparisons and to never assume all rates are equal.
She recommends asking for referrals from others in your industry. Miller says, “There are usually leasing companies who ‘specialize’ in certain industries and they make it easy for you as they understand the business you are in.”
The leasing company should understand your cash flow, tax requirements, seasonal business fluctuations and other operational and financial issues. A leasing company familiar with a particular firm’s industry can also more accurately determine residual rates and the leased equipment’s value at the end of the lease term. This allows the most favorable lease payment schedule.
Miller also advises, “Never have a pre-pay penalty clause.” This is because you may be subject to additional payments or charges if you want to terminate a lease earlier than the agreement states. An unexpected equipment return to a leasing company can change their portfolio mix, since they plan for assets to be part of their portfolio for a specific period of time. Ask up front what early or unexpected lease-end terms will entail.
Brockman advises completing a return on investment (ROI) analysis. Performing a simple cost/benefit analysis that compares the periodic leasing payment to the revenue that is expected to generate from using the equipment will help determine if leasing is a profitable financing option. He observes, “Cost savings could finance your lease payment.”
on August 7th, 2007 at 1:35 pm
Equipment leasing is one of the best thing i did when I started my business; got me a state of the equipments and enough finances to keep my business going..
on August 7th, 2007 at 1:37 pm
Equipment leasing is one of the best thing i did when I started my business; got me a state of the art equipments and enough finances to keep my business going..