·        Get a flexible payment structure to fit your business needs. If your business has a slow season, ask for seasonal payment plans. 
 
·        Consider a leasing program that provides for lease expiration at or near warranty expiration. 
 
·        With an operating lease, if you think you’ll keep the equipment after the lease term, ask for a cap on the purchase price, such as “fair market value (FMV) not to exceed 20% of the equipment’s cost.”
 
·        Use your existing equipment to generate cash. With a sale and leaseback, a leasing company buys your existing equipment and leases it back to you. You get the cash that is locked up in your equipment while still continuing to use it.
 
·        Refinancing your existing equipment with a capital or finance lease can lower payments by as much as 50%. 
 
·        Understand the fine print. Most leases contain a termination value schedule, detailing the amount that will need to be paid to terminate the lease.
 
·        Don’t be afraid to ask for references when shopping for an equipment leasing company.
 

Lease Options

Capital Lease – fixed-term lease similar to a loan agreement for purchase of capital asset on installments.  Lessor’s services are limited to financing the asset, the lessee pays all other costs, including insurance, maintenance, and taxes.  Capital leases are regarded as essentially-equivalent to a sale by the lessor.  Must be shown on lessee’s balance sheet as a fixed asset.  Lessee acquires all economic benefits (such as depreciation) and risks (such as the loss of the leased asset) of ownership, but can claim only the interest portion (not the entire amount) of the lease payment as an expense.

Operating Lease – short-term lease, equipment returned to lessor at lease end, lessor gives lessee the exclusive right to possess and use leased asset for a specific period, but retains almost all risks and rewards of ownership – full amount of lease payment is charged as an expense on the lessee’s income statement but no associated asset or liability (other than lease payment) appears on lessee’s balance sheet.

Sale and Leaseback – Off balance sheet financing in which an owner sells an asset to a leasing firm and, at the same time, lease it (as a lessee) on a long-term basis to retain exclusive possession and use.  Although this arrangement frees capital tied up in a fixed asset, the original owner loses depreciation and tax benefits.  Also called a leaseback.

Loan vs Lease

Does your business need to replace equipment? Are you searching for a lender? There are endless possibilities for commercial financing these days.  With so many choices, how do you sort through them with the confidence you are making the correct decision?

These seven questions will help make your decision easier:

1.   Do I need a traditional big bank with unlimited capacity or would a smaller community bank or perhaps non-traditional lender provide enough capacity?

2.   Do I prefer an on-line application or a face-to-face experience?

3.   Is an existing relationship best or someone new?

4.   Should I seek a provider with the lowest rates along with possible fees and charges or a fair rate with no surprises?

5.   Do I need a quick credit decision (less than 10 minutes) or would a processed decision based on mutual respect, trust, and communication be fast enough?

6.   Is this a one-shot deal or is it better to line up future financing with a trusted partner or many deals over many years?

7.   Am I okay with a lender who will plug my company’s financial statements into their credit scoring model or one who will look beyond the numbers and ask questions to personally understand my story?

Which lender serves your needs best?  How important is pricing? What about trust, timeliness, longevity, integrity, experience? How important is building a future relationship?

There are many choices for financing. Choose one that fits your needs.

Why Corporate Leasing Practices Deserve More Respect

Written by:  Tom Petruno, April 4, 2018 – UCLA Anderson Review

In February 2016, the Financial Accounting Standards Board (FASB) announced a major overhaul to the accounting rules for leases.  The new rules require that all long-term leases be counted on corporate balance sheets as liabilities beginning in 2019.  Current rules distinguish between debt-like “capital leases,” which appear as liabilities, and “operating leases,” which are treated as straight rentals and do not appear as liabilities.  By recording liabilities for operating leases, the new rules will add more than $1 trillion in liabilities to estimated total U.S. corporate liabilities to $26 trillion, according to the FASB.

Historically, operating leases have been “off-balance-sheet” items, usually cited in footnotes of financial statements.  Critics say that invites “window dressing,” or using leases to understate company liabilities and, therefore, financial risk.  But the rule change governing companies’ reporting assets like real estate and machinery – may be targeting an accounting abuse that is more imagined than real, new research suggests.

An extensive study (Documents/sites/faculty/review publications/Caskey Ozel TAR-2016-0176R1, pdf) by UCLA Anderson’s Judson Caskey and N. Bugra Ozel of the University of Texas finds companies’ decisions to use operating leases, rather than debt or capital leases, are primarily driven by business strategy.  More important, operating leases receive not only different accounting treatment, but also different legal treatment.

For example, the bankruptcy code treats capital leases as “secured financing arrangements” subject to similar rules as debt, whereas it treats operating leases as rentals.  In the event of a bankruptcy, an operating lease needn’t get tied up in court proceedings, whereas financiers of debt and capital leases must rely on the bankruptcy settlement.

Because operating leases afford more protection to financiers than capital leases, they help companies gain access to additional financing.  They can also allow a company to get equipment without committing to owning it, a help in uncertain times.  There are also favorable tax treatments that support leasing.

If decisions to use operating leases were largely motivated by a desire to disguise a company’s finances, the study says, you’d expect to see heavy lease activity in situations “where managers have strong incentives to window-dress their financial statements.”  The authors identify such situations, including periods before private companies take themselves public (and want to look as financially fit as possible), and periods before companies borrow heavily (and likewise want to appear healthy to get the best loan terms).

The working paper looked at leasing data from 1990 to 2012 from two separate groups of companies:  142 private and public airlines, because the airline industry has a long history of leasing jets; and the broad universe of 7,712 public U.S. companies.  Overall, the authors found “no evidence that [accounting strategy] plays a major role in leasing decisions.”

In the case of airlines, Caskey and Ozel found that privately held carriers – which don’t have to worry about reporting quarterly financial data to Wall Street – actually rely on operating leases more than publicly-owned airlines.  And in the broad sample of companies, the authors likewise found “no evidence” to associate leasing with efforts to alter reported financial data.

In the interview, Caskey said he was “somewhat neutral” on the value of the new rule.  “On the one hand, it provides a bit of new information, beyond what companies currently report in footnote disclosures about leases,” he said.  “On the other hand, that information can be costly for companies to provide, especially smaller companies with limited accounting staff – and probably lots of leases.”

Lease or Loan to Finance your Vehicles and Equipment?  What you need to know to decide.

When business owners and managers consider business vehicle and equipment acquisitions, they often think of their payment option as a “lease versus buy” decision.  In any economic environment, preserving your owner capital and cash is important.  Financing through a lease or loan helps your business preserve its cash.

 Choosing your Financing Option

 Whether you finance your business vehicles or equipment through a lease or loan, each has its advantages.  In evaluating your options, it’s important to look at each alternative to decide which will best fit your usage, cash flow and financial objectives.  To help determine the most appropriate option, consider the following questions.

 1.     How long will the equipment be used?

·       If the length of time the equipment or vehicle is expected to be used is a short or intermediate term (which usually means 60 months or less), leasing is likely the preferable option.  Vehicles and equipment expected to be used longer than five years could be a candidate for either a lease or loan.

 2.     What is the monthly budget for your vehicle and equipment?

·       With any ongoing business expense, consider the monthly cost for the vehicle and/or equipment and how it fits into your budget.  In general, leasing will provide lower monthly payments.

 3.     What is your cycling plan for your business vehicles?

·       Many small fleet customers look to recycle their business vehicles regularly or according to a plan to lower their repair and maintenance costs and to provide current vehicles to build their brands and keep employee morale up.  Fisher Leasing’s Fleet Management Team can help your business buy the right vehicle and the right price – you get what you want, don’t pay for options you don’t need, and at the right price.

    4.     How is the business vehicle or equipment going to be used?

·       Business vehicles and equipment are revenue-producing assets.  The assets need to operate to generate revenue.  Leasing will provide you the flexibility for skip or irregular payments, step-up payments and payment schedules that will match for cash flow.

5.     How much cash will be required upfront for a lease and for a loan?

·       Leasing can provide 100% financing of the cost of the business vehicles and equipment as well as transportation, delivery, up-fits, and other deferred costs such as sales tax and licenses.  Loans usually require a down payment and do not include other cost benefits.  Also, banks usually take blanket liens on all of your business assets and not just on vehicle or equipment financed as a lease does.

6.     Can the company use the depreciation or would the company get a greater benefit from expensing the lease payments?

·       The tax treatment of the financing is important to your company in choosing between a lease and loan.  A loan provides you with the depreciation tax benefit; with a lease, the lessor owns the equipment and realizes the tax benefit, which is usually reflected in a lower monthly rental payment for your business as well as the ability to expense the entire payment.  In a lot of cases, if your business can’t use the tax benefit, it makes more sense to lease than to purchase through a loan because you can trade the depreciation to the lessor in exchange for better cash flow.

 7.     How will a line of credit be impacted?

·       Many businesses have an operating line of credit through a bank that they use for inventory purchases, improvements and other capital expenditures.  Depending on your loan agreement covenants, it is possible to preserve your bank line by leasing through an independent leasing company.  Our leases have fixed interest rates and the assets leased are the only collateral, not a blanket lien on all of your business assets.

 8.     How flexible does your business want the financing terms to be?

·       A lease can provide greater flexibility, since it can be structured for a variety of contingencies, where a loan is less flexible and subject to the lenders rules.  If your business has continuing use for the equipment at lease termination, extended rentals, purchase options, trade-ups and return options are all available depending on your situation.  The lease term allows your business to match all expenses to the term of the business vehicles and equipment’s use, including income tax expense, book expense and cash expense.

9.     Do you anticipate the need for additional equipment under your financing agreement?

·       If your business is planning for growth, you can use our Master Lease that allows you to acquire multiple business vehicles and equipment under multiple schedules with the same basic terms and conditions.  This provides greater convenience and flexibility that a typical loan, which needs to be renegotiated for additional asset acquisitions.

 10.  Who can help me evaluate what’s best for my business?

·       Whether you finance your business vehicles or equipment through a lease or loan, each has its advantages.  When making your decision, give us a call to help secure the best possible terms for your financing.