By Ken Turner | Edited by Bruce Vernyi, Editor-in-Chief
As the manufacturing industry recoils from a stinging economic climate, machine shops across the nation are searching for ways to regain their footing and stand strong.
Faced with shrinking production, contracting employment and falling prices, times are tougher than ever for shops across almost all sectors of manufacturing.
In a time of decreased cash flow, the idea of upgrading or purchasing new equipment may seem outside the realm of possibility. But, as shop owners look at fresh management and budgetary approaches, they may find an answer in equipment leasing.
There are many reasons shops may wish to upgrade or invest in new machinery and technology, but ultimately, the value of the equipment comes from using it, not owning it.
For many shops, leasing can be a cost effective way to procure the equipment necessary to stay competitive. Because leasing doesn’t require a large capital outlay, shops can conserve their cash, yet continue to acquire the machinery they need to move forward.
When it comes to leasing, it’s important to keep in mind that nearly any type of equipment can be leased, whether metal cutting tools, welding and assembly machinery, or computer hardware and software. Even office furniture can be leased.
In terms of managing a shop’s cash flow, it makes a lot more sense to pay for equipment over time as it is used to generate revenue. In this regard, equipment financing enables a shop to transfer the risks and uncertainties of ownership to the finance company and concentrate on using the machinery as a productive part of business.
The Benefits Add Up
Some of the recognized benefits of leasing machinery or other shop equipment include:
Tax treatment. The IRS does not consider certain leases to be a purchase, but rather a tax-deductible overhead expense. Therefore, shops can deduct the lease payments from income.
100 percent financing. Since a lease often does not require a down payment, it is equivalent to 100 percent financing.
Immediate write-off of the dollars spent. With leasing, payments are treated as expenses on the income statement, so equipment does not have to be depreciated over an extended term.
Flexibility. As a shop’s capital equipment needs change, the lessee may be able to add or upgrade equipment at any point during the lease term.
Asset management. A lease provides the use of equipment for specific periods of time at fixed payments. The leasing company assumes and manages the risk of equipment ownership. At the end of the lease, if the customer elects to return the equipment, the leasing company is responsible for the disposition of the asset.
Upgraded technology. New technology allows shop owners to specialize and compete. Equipment that could depreciate quickly should be leased to limit an imaging center’s risk of getting caught with obsolete equipment. Plus, leases make it easier to upgrade or add equipment to meet ever-changing needs.
Improved cash forecasting. When shop owners lease, they can accurately forecast the cash requirements for equipment since they know the amount and number of lease payments required.
Flexible end-of-term options. There are typically three flexible options at the end of a term. The lessee can return the equipment, purchase the equipment from the leasing company or extend the lease for an additional period of time.
Tax benefits. Leasing companies can pass the tax benefits of ownership on to the businesses in the form of lower monthly payments.
One Size Does Not Fit All
There are a variety of leasing products, with the two most common being the capital lease and the operating lease.
The capital lease, also known as a finance lease, offers the widest flexibility of term length, which can help keep payments low. Capital leases also provide a variety of tax benefits, including the ability to write off depreciation and interest expense for the acquired equipment. At the end of a leasing period with a capital lease, there are a variety of options for next steps. This includes purchasing the equipment at the current fair market value (FMV), renewing the lease at a fixed price or a $1 purchase option.
With an operating lease, or an “off balance sheet lease,” terms are typically shorter than capital leases, and the equipment acts more like a rental. This means the payment does not appear on the company balance sheet. When the term expires, companies may return the equipment, or purchase it at fair market value.
There are also leases available that can be tailored to fit month-to-month or year-to-year cash flow needs. Custom arrangements can be designed to address requirements such as cash flow, budget, transaction structure, cyclical fluctuations, and more. Some leases even allow lessees to miss one or more payments without penalty.
Perhaps the most important step in leasing is seeking the guidance of an experienced and reliable financing partner. There are a number of important things to consider when making this choice.
These include whether the finance company knows your shop’s needs, is flexible and willing to work with your operation, and is quick in its approval of credit applications, among other factors. And, now more than ever, it’s important to select a stable finance partner that can offer guidance through economic ups and downs.
Even faced with the most difficult of economic obstacles, equipment leasing is one tool for shop owners to improve their business outcomes - and improve them now.
KenTurner is senior vice president of Key Equipment Finance’s direct sales group. Key Equipment Finance is one of the largest bank-held equipment finance companies in the U.S. He can be reached at (720) 304-1000.