WASTE COMPANIES RELY on machines every day to operate and grow, but the value of equipment comes from using it, not owning it. A single roll-off truck and enough containers to serve your customers can cost up to $200,000. In a tight economy, laying down that kind of capital up front could have a devastating effect on the books.
While owning equipment has its advantages, leasing allows an organization to transfer the uncertainties and risks of equipment ownership to another company and to concentrate on using that equipment as a productive part of business.
Leasing options are available for both private and public entities. For example, if your organization is operated by the public sector, such as a state or local government, you may qualify for tax-exempt leasing.
Tax-exempt leasing saves man-hours and financing costs, and is an affordable alternative to paying cash or to pursuing traditional bond financing. Under tax-exempt leasing, the lease payment is an annually budgeted expense and is not considered debt under state bonding requirements. Essentially, it provides a pay-as-you-use solution.
A Crash Course on Benefits
Among the advantages to leasing are:
- Tax Treatment
The Internal Revenue Service (IRS), Washington, D.C., does not consider an operating lease to be a purchase but rather a tax-deductible overhead expense. Therefore, companies can deduct the lease payments from corporate income.
- 100 Percent Financing
Because a lease often does not require a down payment, it is equivalent to 100 percent financing.
- Immediate Write-Off
With leasing, payments are treated as expenses on a company income statement, so equipment does not have to be depreciated over five to seven years.
As businesses grow and needs change, equipment can be added or upgraded at any point during the lease term.
- Asset Management
A lease provides the use of equipment for specific time periods for fixed payments. The leasing company assumes and manages the risk of equipment ownership. At the end of the lease term, the leasing company is responsible for disposing of the asset.
- End-of-Term Options
Lessees may choose from three options at the end of a term: return, renew or purchase.
Leasing can allow business owners to respond quickly to new opportunities with minimal documentation and red tape. Many leasing companies can approve applications within one or two days.
- Cash Forecasting
When businesses lease, they can accurately forecast the cash requirements for equipment because they know the amount and number of lease payments required.
- Tax Benefits
Leasing companies can pass the tax benefits of ownership on to the lessee in the form of lower monthly payments.
One Size Does Not Fit All
The two most common leases are the capital lease and operating lease. The capital lease, also known as a finance lease, offers the most flexibility in term length, which can help to keep payments low. Capital leases also provide a variety of tax benefits for equipment. At the end of a leasing period, the lessee may purchase the equipment or renew the lease.
An operating lease, also known as an off-balance-sheet lease, typically provides shorter terms than capital leases, and the equipment is documented more as a rental rather than an investment. This means the asset (leased equipment) does not appear on the company balance sheet. When the term expires, companies may return the equipment or purchase it at the current fair market value.
Leases that can be tailored to fit month-to-month or year-to-year cash flow needs also are available. Custom arrangements can address requirements, such as budget, transaction structure, cyclical fluctuations and more. Some leases even allow companies to seasonally skip one or more payments without penalty.
Find a Compatible Company
After identifying an interest in leasing, the next step is choosing a leasing company that understands your business objectives and long-term financial plans. During initial meetings, be sure the leasing company is experienced with the equipment you need and is committed to the relationship over the long haul. Because leasing companies take the risk of owning equipment, look at their financial strength. Consider whether they will be in business for years to come.
To help businesses find a leasing company, the Equipment Leasing Association (ELA), an Arlington, Va.-based nonprofit association representing companies involved in the equipment leasing and finance industry, has developed a tool called Lease Assistant, available at www.LeaseAssistant.org. In addition to providing a search engine for nearby or specialty leasing companies, the online tool addresses many typical questions and offers tips on how to prepare for signing a contract.
Paul A. Larkins is president and CEO of Key Equipment Finance, Superior, Colo.