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What is a Lease?
In its
simplest terms a lease is a contractual equipment usage
agreement between the equipment owner (lessor) and the equipment
user (lessee). The lessee pays the lessor a monthly lease
payment for the rights to use the equipment. The amount of the
monthly lease payment is dependent upon:
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The
original equipment cost;
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The term
(length) of the lease;
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The
lessor's cost of funds;
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The
credit worthiness of the lessee, and;
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The
sales tax.
At the
end of the lease term the lessee pays a sum of money (the
residual) to take ownership of the equipment. The amount of the
residual left at the end of the term is also taken into
consideration in the pricing of most leases. A higher
anticipated residual value usually translates into lower lease
payments for the lessee.
Lease
payments are due at the beginning of each rental period (i.e.
month, quarter etc.), although some leasing companies require
the first and last or multiply payment(s) at the start of the
contract as a security deposit. One undeniable benefit of
leasing, in most cases a down payment is minimal. Additionally
the payment of taxes such as PST and GST or US tax are
distributed over the term of the contract rather than being paid
up front.
What Kind of Equipment can be Leased?
Essentially, any equipment, transportation, construction,
software, hardware or instrumentation that will depreciate over
time. From $2000.00 to Millions
Some
services and products that cannot be leased are labour, service
contracts, freight and installation costs.
What are the Benefits of Leasing?
Leasing
offers a creative approach to affording the equipment you need.
Note how the "Leasing Solution" is applied to the following
financial problems:
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Problem:
Adequate equipment is necessary for an organization to
operate and complete its research efficiently/productively
but the lump-sum expense is difficult to justify or
accommodate.
The Leasing
Solution:
In a lease, monthly payments rather than an upfront lump sum
enable the organization to obtain the equipment in a timely
fashion to conduct their research.
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Problem:
Large companies or organizations or Cities/Municipalities
will frequently deplete a capital budget before the end of
the fiscal year.
The Leasing
Solution:
With a lease, the company can take delivery now and make monthly
payments from the existing operating budgets or from the new
operating revenues or reduced expenses that result from the use
of the equipment. Money In Motion can even offer a 6 month or budgetary skip
until next fiscal year.
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Problem
Purchasing new equipment reflects poorly in the balance
sheet and annual report to shareholders.
The Leasing
Solution:
Most organizations (particularly businesses) prefer to have
their financial position look as strong as possible to
shareholders and lenders. Lease payments may be entered as
footnote items on a balance sheet and may increase the company's
balance sheet ratios. The company's financial position will be
stronger, more liquid and more profitable. Because it lowers the
company's asset base and increases the reported earnings, a
lease helps to show a higher return on assets (ROA).
"Profits are earned through use - not ownership"
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Leasing
provides 'cash management' advantages. As stated earlier,
leasing requires little up-front cash expenditure upon
acceptance of the equipment. When compared to a typical bank
loan which may require a 20-25 percent down payment and the
payment of all the sales taxes up-front, leasing is clearly
a better financing solution. The fixed contractual nature of
a lease eliminates any uncertainties regarding the future
cost of the equipment acquired so this enables companies to
prepare more accurate cash demand forecasts and plans.
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Leasing
conserves working capital. Of course a loan will do that too
- so long as the bank does not insist on a demand note,
which some accountants will deem makes the loan a current
liability. A demand loan may indirectly restrict capital
available for operations if the bank becomes concerned about
its total exposure when a company's expansion (probably
induced by the new equipment) requires the company to
request increased operating lines. Also, banks can require a
GSA, general securities agreement that can put a lien on
your entire business and can prohibit future endeavors,
lease purchases, expansions etc.
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Leasing
protects credit line facilities. In a period of growth for
your company, these borrowing lines may become critical.
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Leasing
provides opportunities to defer taxes. Not only does a lease
conserve working capital by covering the purchase cost - it
allows the company to pay tax on the rentals rather than up
front. But, and more importantly, if the lease rentals for
the fiscal year exceed what the company could otherwise have
claimed in Capital Cost Allowance (CCA) and interest, then
the tax book profit will be less and more dollars are
retained for working capital. Where the CCA rates are high
(i.e. earth moving equipment) leasing does not usually have
a tax advantage unless the term is very short. For normal
CCA classes (30% and under) a typical 3 year lease will tend
to provide a tax deferring advantage.
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Leasing
offers diversification of lending sources. Federally
chartered banks have, by regulatory law, built in limits on
the availability of loan funds to any single customer.
Diversification of financing sources makes good business
sense whether credit is in short supply or not. At any time
when bank financing normally is available, it is possible,
that a business may fall out of favour with its primary or
only bank, and not be able to access additional funds. Many
lenders expect businesses to reduce their line of credit
from time to time, sometimes. In this case leasing may
provide an additional source of financing.
Leasing versus Purchasing Outright
In the
fast-paced business environment needs are always changing and
leasing makes more sense by allowing companies to update
equipment in a managed, strategic fashion. Technology is
developing quickly, and equipment that was ideal several years
ago is now less efficient. Unless you have an inexhaustible
budget, purchasing a piece of equipment restricts your ability
to update regularly. Leasing allows you that opportunity.
Additionally, if you purchase the system, usually there is no
gain in value between purchase and disposition, and managing the
turnover of equipment takes the focus off your competitive
capabilities and onto depreciation schedules.
How to Qualify for a Lease
Businesses and other Organizations
Lessors prefer to do business with established companies. Having
said that, if you are a homeowner and have a clean credit record
it is possible to get up to $150,000 for a new business.
Businesses with a three year track record or more and with an
active but clean credit record can also get up to $150,000
without much questioning. For the $150,000 to $250,000 range
there should be some indication of volume and profitability
together with a favorable bank relationship. For example, if
your company has sales of $500M and a line of credit of $80M
that is about 50% utilized with good fluctuations - that would
go down well. For amounts over $100,000, at least two years of
financial statements are mandatory unless your company is
publicly traded or is a "name" company. The statements should
reflect a net worth of about 4 times the lease cost; positive
working capital and cash flow (net profit + depreciation) that
is equal to approximately 1~5 times the annual lease payments.
Consumers
Lessors will look for steady employment, a clean credit record
and if you're a homeowner so much the better.
Some Questions and Answers
Are
there any up-front costs or application fees?
No. There are no application fees and no traditional down
payments required. Advance monthly payments may be required
depending on the amount of the lease.
For
how many months should equipment be leased?
It really depends upon the type of the equipment. When equipment
is subject to rapid obsolescence such as a computer, it's
generally advisable to lease for the shortest possible time as
long as the monthly payments still fit comfortably within your
budget. Office furniture, on the other hand, might be leased for
longer periods, with lower monthly payments. If you are
interested in leasing equipment from MIM, an MIM representative
in your area will help you determine the optimal time period
based on the equipment type.
info@moneyinmotioninc.com
Is
leasing equipment similar to leasing a car?
Yes. It's the same concept. You pay for the equipment as you use
it. As your equipment wears out or becomes obsolete, in most
cases, you retain the flexibility to upgrade to more current
technology.
What
happens to the equipment at the end of the lease term?
It's your choice. Many of our leasing programs can be structured
to give you the option of purchasing it for $1.00, for an agreed
percentage of the original cost, or at the fair market value.
You may also have the option to just return the equipment to the
lessor.
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Leasing Language |
