Making the case for equipment leasing
We’ve all heard that old adage, it takes money to make money. We all need equipment to do our jobs and deliver our products or services – and that equipment costs money… or does it.
As businesses continue to compete in the new economy, many are searching for proven new ways to address their equipment financing challenges. The choice for many businesses is clear: equipment leasing. Equipment leasing affords companies the ability to leverage their capital, control cash flow and acquire needed equipment.
According to Equipment Leasing Association (ELA) research, eight out of 10 U.S. companies lease their equipment. Leasing as a strategic financing option continues to grow. Between 1998 and 1999, overall U.S. leasing volume grew more than 15 percent, from $207 billion to $226 billion – the forecast for 2000 promises to bring greater growth.
But why do companies lease equipment? There are a variety of reasons: leasing offers a valuable financing package that allows companies to maximize their purchasing power; factoring all benefits in, leasing is often the least expensive financing method; and leasing equipment transfers the risk of technological obsolesence from the lessee to the lessor.
Every company must consider different options for procuring equipment based on its business model and business environment. Following are two real world case studies which illustrate how companies have used equipment leasing as a strategic means to fulfill a business need.
LEASING ALLOWS EXPANSION
Schmitt Marble, Inc. of Cincinnati, Ohio, is a privately held, marble production company that produces cultured marble countertops, tiles and other marble products. Schmitt Marble has been in business for 30 years, has revenue just shy of $5 million and has 85 employees. In 2000, Schmitt Marble began an expansion and opened a new operation in Columbus, Ohio.
Schmitt Marble was looking for strategic financing methods to fund its expansion. Through business forecasting, Schmitt Marble recognized that the expansion would increase its business by 50 percent. Prior to April 2000, Schmitt Marble did not lease any of its equipment. All company assets were owned. All new equipment procured through the expansion process was leased by Schmitt Marble.
Schmitt Marble realized it had an opportunity to grow its business by 50 percent with the addition of a new production plant. Schmitt Marble had a need for a complete line of marble production equipment such as molds, autocasting equipment and spray booths. Schmitt Marble wanted to lease 40 percent of its overall equipment. Interested in preserving capital and controlling monthly costs, leasing its equipment afforded Schmitt Marble a “total package solution” for financing both the new facility and acquiring the required equipment.
Schmitt Marble considered a loan or a line of credit, but when the company weighed the opportunity costs of a straight out purchase against a lease, leasing offered a better solution. Leasing the equipment provided Schmitt Marble with a payment structure that would match the revenue stream of the new facility.
Key Equipment Finance Group, an equipment leasing company, structured Schmitt Marble’s lease as a finance lease with step payments. This structure allowed the lease payments to match Schmitt Marble’s cash flow. This greatly benefited the company because as its new operation was ramping up, cash flow could be managed and budgeted to meet the payments.
“As a small company, we live on cash. Leasing allows small businesses to creatively control their `cash out’ and keep their costs low while building a company up and expanding to generate new revenue streams,” said Paul Pendergast, president and chief executive officer of Schmitt Marble.
Equipment financing afforded Schmitt Marble the ability to leverage its capital, increase cash flow and maintain more funds for expansion expenditures. Key Equipment Finance Group provided one-to-one service and a total package solution that would enable Schmitt Marble to reach its double-digit growth goal. Key Equipment Finance Group customized a program to meet both Schmitt Marble’s financial and equipment needs.
Equipment leasing offers a variety of benefits which enable companies to meet different business goals. Whereas Schmitt Marble used equipment leasing as a means to expand its business, East Texas Copy Systems used leasing because of the flexibility in terms that leasing offered.
LEASING AFFORDS FLEXIBILITY
East Texas Copy Systems (ETCS) of Tyler, Texas, is an authorized Canon Dealer of digital networked office equipment. With 15 employees, ETCS services large quantity accounts, such as hospitals, school districts, city and county governments and major industries.
One of ETCS’ largest customers, a non-profit health system, wanted to take advantage of leasing equipment as a means to minimize cash outlay and acquire 400 copiers and facsimile machines, as well as to structure a deal that would satisfy the health systems’ billing needs.
ETCS recognized that having the hospital lease copiers from Canon Financial Services would offer more flexible leasing terms, reduce its costs in procuring the equipment and enable the company to pay for the equipment as it is being used.
ETCS needed a flexible, all-cost included leasing program in order to meet its customer’s requirements. When considering financing options, the health system also looked at acquiring the copiers using a bank line of credit; however, leasing the equipment from Canon Financial proved to be a more flexible and process-efficient solution.
The challenge of meeting the customer’s billing needs was to integrate an aggregate cost-per-copy billing cycle with individual cost center reporting. Canon Financial structured the lease to meet the billing needs defined by the health system. Each copier was billed with individual reporting to its own cost center. Aggregate pricing was based on lease volume within a 60-day period; thereby, lowering the lease price as the hospital continued to order copiers.
Canon Financial Services’ flexible invoicing accommodated the hospital’s payment terms, thus avoiding administrative delinquency, which had been a problem with the hospital’s previous financing source.
The flexible lease that ETCS developed with Canon Financial Services afforded the hospital the ability to lease six to 10 copiers per month; reducing monthly capital outlay while affording the hospital the equipment needed to supply its growing demand for copiers. This arrangement allowed ETCS to win the hospital’s business and steadily increase its volume leased through Canon Financial Services based on equipment demand.
“Canon Financial Services structured the billing cycle to the individual cost centers, making it more convenient for the hospital’s different invoicing needs,” said Greg Walker, ETCS president. “Canon Financial Services really proved to be extremely customer service-oriented, just as we like to be at ETCS.”
Leasing their copiers afforded the health system the ability to both leverage its capital in addition to, protecting itself from technical obsolescence.
LEASING IS GOOD BUSINESS
The benefits Schmitt Marble and East Texas Copy Services reaped by leasing their equipment are not the only benefits that leasing offers companies looking to grow their businesses. Leasing offers numerous advantages: Flexibility and customized solutions
In today’s business environment, you need the flexibility to manage your business income efficiently and profitably. Companies have different needs, cash flow patterns, and, sometimes irregular streams of income. With leasing, you can design a program to address your cash flow and budget requirements. You get the equipment you need and the flexibility you want.
Increased purchasing power.
Lease financing allows you to acquire better equipment, often more top-of-the line, than you could with cash.
Clean balance sheet.
Leasing helps conserve your operating capital. Your working capital and bank credit lines remain available for inventory, expansion and emergencies. Leasing helps you better manage your balance sheet.
100 percent financing.
With leasing, you avoid costly down payments. The term of the lease can be matched with the useful life of the equipment.
To survive today, you often need to move fast. Leasing can allow you to respond quickly with minimal documentation and red tape.
Hedge against inflation.
A lease provides the use of equipment for specific periods of time at fixed payments. This fixed-rate pricing protects against inflation. You get today’s equipment with tomorrow’s dollars.
Some lease programs allow you to make the lease payment and deduct it as a business expense. An operating lease allows a company to potentially accelerate the expense or “write-off’ of equipment. This can result in a significant tax advantage by decreasing net income.
Leasing allows you to keep pace with technology. Your risk of getting caught with obsolete equipment is lower because you can upgrade or add equipment to meet your ever-changing needs.
THE BOTTOM LINE
Identifying flexible financing options is an ever-present challenge for most businesses. For many, leasing is part of the solution. Leasing offers many advantages over traditional financing options – from flexibility and convenience to a clean balance sheet and a technological edge. To learn more about leasing, visit EL-Ns LeaseAssistant Web site at www.LeaseAssistant.org/.
EDITOR’S NOTES: Michael J. Fleming is the president of the Equipment Leasing Association of America (ELA). ELA, a nonprofit organization headquartered in Arlington, VA., representing over 800 member companies, which provide a variety of asset-based financial products, primarily equipment leasing.
BY MICHAEL FLEMING, PRESIDENT EQUIPMENT LEASING ASSOCIATION
Copyright B U S Publishing Group, Inc. Sep 2000
Provided by ProQuest Information and Learning Company. All rights Reserved