Leasing can conserve capital, provide funding

Fact: 80 percent of all companies lease some, if not all of their equipment. The Equipment Leasing Association says that of the $600 billion spent on equipment in 1999, 30 percent of that amount was in leasing.

The reasons to lease are unique to each business, but the steady increase in leasing indicates it is a dominant tool for growth in business activity.

Types of leases

Tax lease: In order for it to be a tax lease, the lessor must be at risk by the retention of a significant residual interest. Operating leases fall into this category. For the lessee, it is an "off-balance-sheet transaction," in which the entire amount of the payment is an expense on the income statement.

Finance lease: Ownership of the equipment transfers as soon as all of the payments have been received by the lessor. The more popular forms are $1 buyout leases, in which the equipment title automatically transfers after the last monthly payment, and a fixed purchase option, which usually requires 10 percent of the value to be paid at the end of the lease. These types of leases require the company to capitalize the equipment on the balance sheet as an asset.

Lease payments

Most leases are written with payments due monthly in advance.

The leases can be written with quarterly, semiannual or annual payment streams.

In addition, because of the flexibility of leasing, the lessee may take advantage of step leases or skip leases. A step-up lease is one in which payments increase during the term. This helps the lessee conserve cash until the equipment is producing profits.

A skipped payment plan is advantageous to those companies that have seasonal or cyclical cash-flow constraints.

Getting approved

Small ticket leases: These are transactions up to $75,000, but some lessors will go higher for specific programs. Typically, the lessee will be approved based on a one-page credit application. The process is determined by the credit scores of the owners or guarantors of the lessee company and the company's credit history.

Very little emphasis is placed on the equipment except in a negative manner. Most leasing companies have a list of restricted equipment that they cannot accept.

Middle market: As these transactions fill the gap between small and large leases, all types of structures are offered and can often be driven by conflicting factors. Price and convenience are the driving forces in this segment. Detailed financial packages are required and proposal fees are very common, depending upon the amount of the transaction.

Large ticket leases: These are transactions in excess of $1 million. This market is very price-sensitive, as it focuses on much higher priced equipment. In this arena, most transactions are complex, tax-oriented leases. A detailed financial package is required.

Advantages of leasing

Conserves working capital: Since there is no down payment, working capital is conserved for other needs.

Preserves credit lines: Since banks limit the amount of credit you may use, leasing preserves credit lines while providing you with the financial resources you need.

100 percent financing: Costs of freight, installation and up-front training can be included in the lease.

Financial flexibility: Because of extended terms, payment amounts can be much lower than they would be if the equipment were purchased with borrowed funds. Different payment amounts can be included in the lease, such as step and seasonal payments described above. In addition, payments can be structured on a quarterly, semi-annual or annual basis.

Tax benefits: Unlike loan payments, certain types of leases may be fully deductible as operational expense.

equipment obsolescence: Leasing allows you to regularly upgrade your equipment to a state-of-the-art level, eliminating the inefficiencies of owning outdated equipment.

Easy application: Unlike bank loans that require volumes of paperwork and an approval by a loan committee, the lease application process is simple. For small ticket transactions under $75,000, a one page application form is required and you can expect an answer within 24 hours.

Equipment leasing is a dynamic and powerful means of financing for any size company.

Many companies find that the flexibility, practicality and cost-effectiveness of leasing can smooth cash flow and capital budgeting for improved financial results.

(Kent Harlan is a CPA in private business and owner of Ozarks Capital Funding in Springfield.)