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Q: What are the major factors that must be taken into consideration when you are deciding to lease or buy a piece of capital equipment?
Joan Peterson, operations manager, SCMI Leasing: Leasing offers a great alternative in preserving customers' cash flow, as it does not require a large cash outlay. A minimal down payment consisting of a first and last payment is usually required in advance, and the monthly payments remain the same for the duration of the lease.
Lenders in this industry understand the equipment and its use, which in turn generates fast and easy approvals.
Many accountants advise their customers to lease, as it can offer distinct tax benefits and preserves their bank credit lines.
Leasing rates are competitive and comparable to bank financing. Plus, electronic documents can be generated the same day as the approval so you can watch a machine demo, apply for credit, have documents signed and receive a purchase order all in the same day.
Thomas Strickfaden, vice president, National City Manufacturing Finance: Owning a piece of equipment does not necessarily translate into making profits. The use of a piece of machinery to make a product is what makes a company income. Leasing provides an easy, affordable method of using equipment that allows a monthly payment without obtaining a bank loan or worrying about budget justification. Leasing also keeps your other lines of credit open and total system financing, including delivery and installation, can be spread over the lease term. When acquiring new equipment, leasing provides advantages such as:
- Conservation of cash: Leasing doesn't require the cash outlay of a purchase.
- Longer terms and lower payments — Lease terms can be flexible up to 84 months.
- Periodic equipment updates — Reduce obsolescence risks with life cycle management.
- Manageable upfront costs — Little or no down payment.
- Purchase options — At lease end, purchase at agreed upon price or return the equipment.
- 100 percent financing — "Soft costs" such as installation, etc., can be added.
- Tax advantages — As an expense, lease payments may reduce tax liability.
- Simplified documentation — Minimal paperwork.
- Customized lease options and payment plans — Alternatives to meet your cash-flow needs.
- Time value of money benefits — Acquire equipment with today's cheaper dollars.
Sylvia Stock, leasing manager, National Capital Leasing: Significant factors to consider when choosing to lease or buy equipment are:
- Your cash — Hold or spend it; leasing preserves capital for other uses whether they are known or those that are unforeseen.
- Cost level — Instead of a large upfront dollar outlay when purchasing equipment, leasing minimizes it. Another way of asking that question is: "Do I have enough extra capital to spend today for something that will make me money (pay back) in months and years to come?"
- Equipment value — There is little financial benefit for leasing, when acquiring equipment under $5,000, due to fees ranging from $150 to $400 and higher rates for lower dollar lease amounts.
Q: In the medical field, leasing of high-tech equipment for infrequent use is common. Does it make sense to lease a machine for a short period of time for one particular project that involves a process that a manufacturer wouldn't necessarily be involved with? Why or why not?
Peterson, SCMI Leasing: The market for leasing in the woodworking industry does not normally extend to short-term, single project ventures. The type of leases you refer to are operating leases or true rentals. High-tech equipment financed through operating lease structures makes sense because the equipment does not tend to hold its value as well as hard assets. Why finance to own something that will be obsolete by the time the payments are completed? Woodworking machinery, on the other hand, tends to hold its value very well. Consequently, most of our customers prefer to make payments that will apply to ownership of the equipment.
Stickfaden, National City Manufacturing Finance: Short-term leasing is available, but as you might anticipate it could be at a higher price. This holds true in most industries. It is not uncommon for a customer to choose to lease a piece of equipment for one particular job, if they know they can acquire the piece of equipment with 100 percent financing. Then, the lessee can find additional work for a specific machine at the end of the initial lease period, which would make an initial longer term, fixed payment lease more attractive and less expensive.
Stock, National Capital Leasing: Begin by asking, "Will this machine pay for itself on this one project or over that short period of time?" Estimate the projected revenue and compare it to outsourcing, leasing or acquisition of the equipment. Outsourcing is probably the best solution if only a low or partial yield of the equipment expense is possible.
With higher revenue projections over and above the equipment cost, consider leasing or purchasing. Standard leasing terms are between 24 and 60 months; a short-term lease of 24 months might be the most desirable for the "One Big Job" situation. Make sure the 24 monthly payments are covered by the profits and revenues of the project and you are on the winning side.
Since you most likely will not have used the equipment excessively and it is only 2 years old, you can now sell it for good money on the used machinery market. A "Fair Market Value" lease with significantly lower monthly payments is another meaningful option for a "short-term lease" where the 2-year-old equipment still has current technology and thus will be very marketable.
Q: If you do choose to lease a piece of equipment, how do you decide between the machinery supplier that has its own leasing department or a leasing company?
Peterson, SCMI Leasing: The advantage of using a manufacturer's in-house leasing department is the common goal of getting the customer to buy its product and in turn establishing a long-term relationship for future business. Manufacturers offer the most flexible programs; competitive rates, quick decisions and documentation turnaround, as well as having expertise in both the manufacturer's product and the leasing industry.
Unlike manufacturers, banks and independent leasing companies come and go. They get in and out of industries as their management decides. In-house leasing departments have the advantage of being financially backed by the manufacturer, so they can focus on driving sales and total customer satisfaction. The volume that manufacturers generate attracts large national banks with solid reputations offering competitive rates to obtain the portfolio. This results in a win-win situation for the customer and the manufacturer.
Stickfaden, National City Manufacturing Finance: Usually, the machinery supplier's own leasing department is the preferred choice of financing a piece of equipment for both the supplier and purchaser of the equipment. The one-stop shopping effect allows the customers to focus on their normal day-to-day operations while the machinery supplier approves them for the financing.
Stock, National Capital Leasing: If by a "supplier" you mean a machinery distributor, there is little difference between them and leasing/financing companies. If "supplier" means the equipment manufacturer/importer, this supplier/leasing type may be able to offer subsidized financing because they have already realized revenue from the equipment sale itself. They typically have more lenient credit requirements since they are familiar with the remarketability of the equipment.
The benefit offered by an independent leasing/finance company is its ability to accommodate multiple acquisitions and vendors all within one transaction. More often than not, they are rate-competitive with manufacturer's financing. In addition, a prior approval from an outside leasing company before purchase commitments can greatly assist the buyer in price negotiations with the equipment vendor.
Whatever leasing company you choose, it is most advantageous to select one within the industry because they understand your business, the business potential, and the equipment of which they are taking title.