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Call Us today for a lease payment Quotation and Application 650-342-8691 Click here to download an application in Word (.DOC) or here for a PDF file. Benefits Of An Operating Lease
Overview We are committed to the long-term collateral value of packaging and processing equipment - and has the resources to make an equity investment in each lease. This means that we offer tax-advantaged Operating Lease structure on most transactions. What Is An Operating Lease? An Operating Lease provides the end-user with (a) lower monthly payments than other (capital) leases; (b) an option to purchase the equipment at the end of the initial term; and (c) important tax and accounting advantages. This type of financing must pass certain Financial Accounting Standards Board tests and Internal Revenue Code regulations. The full amount of each lease payment becomes an Expense Item, which is fully deductible against Earned Income. The transaction does not need to appear on your Balance Sheet. You do not show the leased equipment as an Asset; and your lease payment obligations do not appear as a Liability. Why Lease? Overview Leasing meets one or more of the needs of almost every type and size of business - from new ventures to Fortune 100 companies. Some of the benefits of leasing include:
More information: In General Leasing meets one or more of the needs of almost every type and size of business. If a qualifying (FASB 13) Operating Lease [Tax & Accounting Benefits] can be made available to the customer, then significant tax and accounting benefits may apply - that serve to significantly lower the after-tax cost of the equipment. Financially mature, profitable companies may lease equipment to keep bank credit lines available for other purposes. Young, start-up companies lease to conserve cash, while other companies requiring state-of-the-art technology lease equipment to avoid obsolescence and preserve their ability to upgrade the equipment. Managers within large companies may need to be free to acquire non Capital Budget equipment; midsized companies often cannot attract capital through the stock or bond markets; and small companies frequently prefer to make manageable, periodic payments versus a large capital expense. We've presented a brief outline of several of the most common reasons why our customers lease packaging and food processing equipment: Capital Budget Constraints Many large, financially mature companies choose to lease for one reason: to avoid various capital budget requirements and approval levels. A division or department of a large firm may have sufficient funds to purchase a new piece of equipment outright. However, if the division or department has already fully utilized its budgeted amount for capital expenditures, it most likely will be precluded from purchasing the equipment. Additional capital expenditure funds can be requested, but that process is often difficult, time-consuming, and frequently unsuccessful. If equipment is leased, the monthly lease/rental payments are paid from the Operating Budget - not the Capital Budget. A lease structured as an Operating Lease for financial reporting purposes appears as a periodic expense on the lessee's income statement. It is not reflected on the lessee's balance sheet and is paid for out of its operating budget. By leasing, the department obtains the equipment it needs and avoids the capital budget scrutiny that may not have worked in its favor. Leasing Versus Cash Purchase or Bank Financing The acquisition of assets through leasing versus a cash purchase or traditional bank financing becomes more desirable as the cost of equipment increases. As new, more sophisticated, and more expensive equipment becomes available, leasing becomes more attractive for several reasons. Down Payments Typically, a leasing transaction requires only one or two lease rental payments when the lease agreement is executed. This usually represents only about 2%-4% of the cost of the equipment, and includes the initial, scheduled payment(s). Most banks require 10%-25% - a cash outlay that is not recoverable. Soft Costs Incidental, soft costs associated with acquiring equipment can routinely be included in a lease, rather than being paid in cash. Items such as delivery, installation, spare parts, training, and sales tax can be incorporated into the monthly lease payment - and are not paid up front. Opportunity Cost of Capital The soft costs of acquiring equipment can often be significant. When these costs are included in a lease, this allows a company to employ the cash savings for other more profitable working capital requirements. The ability to save the "opportunity cost" of capital in equipment acquisitions makes leasing especially attractive for growing, cash-intensive companies that require an ongoing investment in highly profitable inventory and receivables. Working Capital Companies sometimes mistakenly use funds earmarked for short-term working capital requirements to purchase long-term assets, thereby hindering the firm's day-to-day operations, and its ability to meet short-term credit obligations. Leasing helps to conserve working capital for its intended purpose. Cash Flow Leasing may also be more affordable than conventional loan financing because of the potentially lower monthly payment in a lease versus a loan. The amount of the lease payment can be impacted by several variables, including the value of tax benefits, the purchase option that is built into lease pricing; and the term of the lease - which is typically longer than what is available through traditional bank financing. Non-Restrictive Financing Banks often build restrictive covenants into business loan agreements. These typically include current ratio, debt-to-equity ratio limits - and other minimum measures of profitability. In theory, even a relatively minor technical violation of any of these criteria may influence the lender to request that the loan obligation be repaid or restructured. Lease agreements do not contain restrictive covenants that can reduce a company's decision making autonomy and independence. The leasing company will build its perceived risk into the pricing of the lease, which will include a consideration of the collateral value of the leased equipment. Leasing offers great flexibility; and does not restrict or impact the customer's future financing options. Improved Cash Forecasting In a lease agreement, the lessee (end user) is permitted to use the leased equipment for a specific period of time and agrees to pay a periodic lease/rental charge. The fixed contractual nature of the lease obligation eliminates any uncertainties regarding the future cost of the equipment. This allows companies to prepare more accurate cash forecasts and plans. The end-user knows that a decision must be made at the end of the initial lease term, as to whether the equipment should be purchased, returned to the leasing company, or the lease renewed. Once this decision has been made, the cost of the end-of-term option can be determined and integrated into the planning and forecasting process, facilitating the accurate preparation of the overall company budget. Project Reimbursements Companies operating in certain regulated industries, as well as contract packagers and production facilities, are reimbursed in various ways for the expenses they have incurred, depending on the nature of the expense. Lease expense can be recovered more quickly than depreciation and interest expense incurred in purchasing an asset. In many cases, lease expense is viewed as an expense tied to a certain project or time period, whereas interest expense or depreciation for a long-term asset may not be accepted as a project expense and, therefore, may not be immediately reimbursable. Use Versus Ownership The use of packaging or food processing equipment is far more important to the production of income than a piece of paper conveying title to the equipment - as it is the use of equipment that produces profit, not ownership. In fact, if equipment can be used for most of its economic life without the user having the full legal responsibilities, risks and burdens of ownership, then little value exists in the actual ownership of the equipment. Psychologically, some people are unwilling or unable to separate the concept of asset use from asset ownership but a growing number of businesses are finding that ownership of equipment is not nearly as important as other aspects of equipment acquisition. For example, ownership of the equipment may not be as important to a company as acquiring only the use of the equipment at the lowest possible cost, or with the least expense. In many cases, leasing equipment is likely to result in lower acquisitions, which implies greater profitability to the end user. Diversification Of Financing Sources The U.S. economy has seen recent interest increases in the cost and availability of conventional bank financing, and many businesses are acutely aware of the risks of depending solely upon conventional sources of equipment financing. Diversification of financing sources makes good business sense whether credit is in short supply or not. It is important to note that federally chartered banks have, by regulatory law, built-in limits on the availability of loanable funds to any single customer. |
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