Are you having trouble getting financing for the equipment you need to grow your company? Leasing is one alternative to purchasing pricey equipment outright, and a solution when the bank says no.
Sure, you’re going to have to make payments similar to those you would have made had you bought the equipment, but in the short term, leasing equipment — everything from computers to back hoes — keeps your capital fluid. Your money won’t be tied up in thousands or millions of dollars of assets, when all you really need is the use of the equipment, not ownership.
Steve Fuller, owner of Alpha Graphics in Akron, leases large copiers and digital color printers from companies such as Xerox, Cannon and IBM. He says that along with not having to outlay large amounts of cash, he leases for what he calls the “obsolescence factor.”
To stay on top of the rapidly changing technology he deals with, he leases certain equipment. When it becomes obsolete, he contacts the manufacturer and arranges a new lease with updated equipment.
“It’s not like they give you something for nothing,” he says. “They factor all the costs into the new lease.”
This option saves Fuller the time of trying to get rid of obsolete equipment.
“Leasing has allowed me to expand faster than I would have otherwise,” he says.
The Equipment Leasing Association of America reports that new leasing business has increased 32 percent since the first quarter of 1998. The same study concludes that eight out of 10 American companies now lease some portion of their equipment.
“Leasing companies nationwide, not just us, have been working with small businesses for the past 30 years — helping them grow by letting them obtain the equipment they need to do what they do and grow their business,” says Anthony Polito Jr., executive vice president of Preferred Capital Inc. in Brecksville. “Our bread and butter customer is a company with 50 or less employees.”
Preferred Capital leases everything from mowing equipment for landscapers to office furniture and restaurant and medical equipment. The firm is even trying to purchase an armored car for a client.
“What you find is that there’s a lot of equipment that the consumer or even small business person, in the normal course of the day, would look around and not realize is leased,” says Jeffrey Eakin, senior vice president of Preferred Capital. “What I call very, very ordinary things.”
A common misperception about leasing companies is that they are like rental houses, where the customer comes in and picks equipment from what is available. In reality, customers choose what equipment they need and from which manufacturer. The leasing company then steps in, purchases it, and leases the brand new equipment to the customer.
“What leasing does is allows the end user to enjoy the equipment and pay small monthly fees, hopefully equal to or less than the generated profit or savings,” Polito says.
In many cases, leasing companies are taking the place of banks, but without many of the hassles associated with applying for a loan. “It happens much faster,” says Polito. “Generally speaking, the terms are far more flexible. The ability to structure a transaction to meet the customers needs is far easier for an equipment leasing company than it would be for a more traditional lender.”
Another advantage is the leasing company’s ability to bundle the costs of installation, warranties, insurance and other add-ons into the lease, making things simpler for the end user.
Polito enjoys watching his clients’ businesses grow, in part because that’s his job, but also because he has been there, as owner of King Cantina in Hudson.
“The bad news is, in our situation, is often times we lose a customer as they get more and more successful, because at that point, they are buying more expensive equipment and more traditional lenders step in.”
Revenue streaming 101
An Ohio landscaper’s business operates, on average, seven months a year. To operate his business, he needs a $10,000 mower.
Under traditional financing, the landscaper would have to make 12 monthly payments a year on the mower. With the revenue streaming option, he can make payments based on his monthly income, which may be heavier in some months and nonexistent in others. Many leasing companies offer a “five and seven program,” under which the landscaper makes payments on the mower during the seven months it is being used.
“We might also then flip it around and say, ‘We’ll lease you a truck and a snowplow,’ and adjust the payments to take into account the fact he’s using the truck year round,” says Jeffrey Eakin, senior vice president of Preferred Capital. “That payment might be a 12-month payment, but we adjust it a little bit around the winter months to take into account that’s when he’s generating money to pay for the plow.”