The speed of change is altering the rules about how to grow a successful company. Purchasing new equipment, for example, is no longer the obvious answer when it's time to ramp up production; not when today's high-tech devices and machinery go out of date almost as quickly as they reach the market.
Many shrewd business leaders are realizing that it might be wise to devote their precious capital to hiring employees, training them, and marketing what they create. To acquire necessities such as computers, servers and security devices – things that might be useful for only a limited time – it might be smarter to obtain financing or, perhaps better yet, to lease them, said Bill Verhelle, CEO of First American Equipment Finance, which provides both purchase and lease financing.
"Instead of paying for the equipment up front, leasing allows you to pay for it as expected additional revenue comes in from using the equipment," Verhelle said. "When a company is expanding, there are a lot of things to spend money on."
Leasing has become particularly appealing – to small businesses, large corporations and major institutions such as universities and hospitals – due to the fast pace of advancement in computers and other technology, said Verhelle.
"Increasingly, what we really see are customers trying to manage technical obsolescence," he said.
Ithaca College, in upstate New York, has leased virtually all of its important technology – computer notebooks, servers, routers, switching equipment and video-conferencing equipment – for the past 10 years, using a series of two-and three-year leases to continually "refresh" the inventory, Verhelle said. Offering the very latest technology helps schools attract top-tier faculty and students, he said.
Health-care companies, from major medical centers to small general-practitioners, dentists and orthodontists, have a similar motivation to lease. Corporations that lease office space may also choose to lease the furniture that fills that space, rather than spend, in some cases, millions for custom furnishings. When the building lease is up, the company can simply walk away from the furniture too, rather than trying to make it fit in a different space.
Law firms typically lease their furnishings, Verhelle said. In fact, he said, well over 90 percent of Fortune 500 companies lease at least some of the equipment they use.
Besides making it easy to stay current, leasing can make financial sense because the user pays only a pro-rated portion of the equipment's total value. Typically, when a lease it up, it can be extended if necessary, or the equipment can be replaced with newer models under a new lease. Some arrangements allow specialized options, based on the unique needs of the client.
Leasing does not make sense in every case. While lease payments may be a tax-deductible expense, other tax incentives, such as depreciation, might favor ownership of equipment. First American helps clients sift through the ramifications of each option, offering clients financing or leasing. Leasing may become more expensive than financing if a lease is extended again and again for the same equipment, Verhelle said.
Business owners and CFOs should be careful to examine the details of the lease contract. When leasing equipment, companies might choose to finance or lease a service contract to provide for unexpected repairs. Equipment finance agreements and leasing agreements are typically only secured (collateralized) by the new equipment being financed. This makes the process relatively simple and fast, compared to other forms of financing that might encumber additional obligor assets.
Online business calculators are a tool for comparing the costs of leasing with the costs of buying, but Verhelle recommends going further than that.
"Once you've decided there's a business reason to consider leasing, you should talk with your banker or someone here at First American to do a lease-versus-buy analysis," he said. "They can weigh the cash flow, financial reporting implications and tax consequences and walk you through the cash flows of each option."
Contact a leasing specialist for more information at 800-801-3830 or visit http://faef.com to learn more.