By Joel Ronan
Higher margins. By offering a monthly lease payment, most distributors see an increase in their profit margins. Why? Because many times the financial terms are more important than the price paid. For example, the difference between a payment of $6,132.05 and $6,111.01 is only $21.04 per month. Few customers would object to that difference. Yet it means another $1,000 to the selling price of the parking systems.
Close more sales. By obtaining credit information upfront and getting the lease approved, you maintain control of the selling process. Why send your customer out shopping for financing after you have the order for the system? A lot can happen during that time, including that your customer decides to go with someone who offers leasing.
Conservation of credit. Leasing provides an alternative line of credit to businesses. A lease is not a loan, and in many cases has no impact on the borrowing power that the businessperson has at the bank. These days, businesses are keeping their bank lines and cash intact and leasing their equipment. Leasing, therefore, becomes a new source of credit.
100% financing. This conserves capital, which is the life blood of a business. Keep in mind that in most cases all that is required is one payment upfront. That means that on a $300,000 project, the customer puts down approximately $6,200 to start the process. Banks typically require 20% to 25% down. Why is this so significant?
Today, there is an urgent need for businesses to retain their cash. Banks are not lending in any significant amounts, so survival requires businesspeople to manage their cash flow rigorously. Added to that is the fact that most businesses have seen their receivables harder to collect, further putting demands on their cash.
Consider also that cash can be used for other purposes such as inventory, expanding sales, etc. The average annual return on capital in businesses is 25% before taxes. Cash truly is king.
Off balance sheet financing. If the lease is structured as an operating lease, the payments are simply written off each month as a operating expense. The asset does not appear on the balance sheet as the ownership of the parking system remains with the leasing company. This improves your debt-to-equity ratios and allows the customer to be in a better position for other financing.
Upgrades and add-ons are a breeze. Once the leasing company has your customerís credit information, it is easy to add on equipment and simply increase the payment. Also, you can upgrade the equipment before the end of the term by getting a payoff amount and wrapping that into the amount of the new parking system, less any trade-in allowance you may give.
Tax benefits. This is an individual issue and cannot be emphatically stated without consulting with the customerís accountant or tax attorney. But many companies save taxes through leasing by writing an operating lease on a short term. The payments are higher than the allowable amount they could take in depreciation if they were financing or paying cash. This allows them to accelerate the write-off period over a shorter period of time and thus lower their taxable income.
Maintenance agreements. Many leasing companies allow you to bundle the equipment with maintenance agreements. This gives your customer one payment for everything. It also ensures both parties what the maintenance costs will be over the next several years.
Hedges against inflation. Not many people are thinking about inflation these days, but most economists will tell you that an inflationary period is almost certain to follow these hard times. With leasing, your payment is locked in for the initial lease term.
Leasing is here to stay, and itís a dynamic way to grow a business in these tight and changing economic times. In order to determine if there are tax or accounting advantages, the customer should always consult their tax adviser as benefits, or lack thereof, depend on many factors.
Joel Ronan is the owner of Atlantic Business Credit. He can be reached at firstname.lastname@example.org
Article Abstract from December, 2009