By Vincent Belcastro
From the June 2013 issue of Today’s Facility Manager
Equipment leasing is a strategic financial option for businesses to consider regardless of the economic climate. But it is an even more attractive option given the current environment where maintaining cash flow, preserving capital, and obtaining flexible financial solutions are even more critical as businesses ride out the storm. Uncertainty, negative economic conditions, and deteriorating forecasts are challenges to growing a business, but for those that want to stay competitive—especially during a downward economy—it is critical to be strategic. One area where facility managers (fms) can apply strategic thinking is in equipment acquisition.
Lease financing is a viable option for acquiring equipment, and it is important to know the ins and outs in order to negotiate what is best for the organization.
To provide a primer on this issue, the following addresses areas for fms to consider when evaluating whether or not to lease needed equipment.
What are the leading reasons that facility management (FM) professionals might consider leasing equipment, rather than purchasing?
The economics in lease versus buy, which is an individualized analysis for each company, may lower payments throughout the term of the transaction, and could provide flexibility and, potentially, a more economic payment structure. This compares to direct purchases where the entire asset costs over the term of the loan are amortized even though neither the asset nor the economic life is needed for the entire length of the term loan. This leads to less capital outlay where a company effectively only pays for the usage it has under the lease term. And there is less down payment required, while providing the company a potentially advanced fleet of equipment.
Generally speaking, what are the primary lease financing structures available in the equipment market today?
The primary lease structures available in the equipment market today depend on the asset class. Fms want a lender that has the ability to structure operating leases, capital leases, term loan transactions, and track leases which are applicable to assets that operate over the road. They also want a company that has the capabilities to structure sale leasebacks for used equipment and establish equipment revolving lines of credit.
Ultimately, fms want to work with lenders that have vast experience in developing innovative financial products and services that are flexible, affordable and tailored to the customers’ specific needs.
Fms want a team that can design specific solutions that take into consideration their company’s business cycles, seasonal needs, specialized equipment requirements, and other factors.
What are the top three questions that an fm should ask a potential lease provider?
Facility managers should ask potential lease providers: What is the economic life of the asset? What maintenance clauses are within the lease? And, what are the end of lease term provisions?
They may also want to ask what the lender’s view of the economic life of the asset is, the relationship to the estimated residual value at the end of the lease, and what the buyout provisions are.
Are there tax benefits (or challenges) that fms in certain industries should be aware of?
There are tax benefits involved in off balance sheet financing, and those will differ for every company. So if tax considerations are an issue, the fm should converse with his or her internal finance team or seek outside tax counsel.
What other advice would you like to share with fms who consider equipment leasing?
Lease financing can provide an attractive alternative to owning. In addition it could potentially provide a more affordable solution to outright purchases, which will allow an fm to deploy unused capital for other projects.
Lenders who specialize in equipment financing and leasing can put money to work faster because they typically lend it against a single asset or a pool of assets (the actual equipment being leased or financed). This means much less documentation is required and companies can get to closing quicker.
It’s also important to partner with a lender who is constantly on the lookout for financing solutions to support a company’s growth needs. One way an experienced partner can support a growing company is by helping them tap hidden sources of liquidity within its existing asset base.
Belcastro is managing director and group head of CIT Capital Equipment Finance where he is responsible for overseeing financing activities for large ticket equipment leasing and lending as well as project finance related activities. Belcastro is a senior credit professional and expert structuring specialist with more than 20 years of secured financing and leveraged finance experience primarily in the corporate middle market arena. He is an active member of the Commercial Finance Association, Equipment Leasing and Finance Association, among other groups.