Financing 101: An Introduction to Leasing
by GreatAmerica on Tuesday, June 23, 2009
Eighty percent of all companies, large and small, finance equipment and one-third of all equipment is leased.
If you are not convinced why this fact is important to you, consider this real-life example. Recently, we were contacted by a remanufacturer who was ready to close a sizeable deal for approximately 150 printers and consumables. Right before the customer signed the deal, he asked about a finance option for the printers. The remanufacturer did not have a program set up and the deal stalled — not a good place to be.
Financing provides a way for businesses to invest in capital, while managing their balance sheets, cash flow, and technology, all of which is imperative in the current economy. If you are going to market without offering your customers the option to lease, you are missing a valuable tool that can help you gain more business. If you are considering adding equipment lines or a managed print services (MPS) program, this overview will help you better understand the basics of leasing.
What is a lease?
A lease is a legal document that allows one company (called a lessee) to possess property belonging to another company (called lessor) for a specified period at the will of either lessor or lessee in consideration of a specified payment.
Why offer lease financing?
There are many reasons customers would use a lease-finance agreement. The first is convenience. Using a lease agreement is much easier than trying to get through all the red tape when dealing with a bank. Credit decisions are quick. Paperwork is limited and easy to understand with lease agreements.
Lease financing helps your customers conserve cash flow and preserve bank lines. Soft costs such as installation, insurance, and maintenance can be included in the lease payment. The lease program can be customized to fit budget needs and leasing usually does not require a down payment. Some lessees are even eligible for tax advantages. However, it is important to always consult a tax advisor about tax benefits of leasing.
Financing equipment is a proven way to acquire equipment while conserving capital. It does not tie up existing credit lines. Preserve your customers’ capital for critical areas such as personnel, inventory or advertising.
Another benefit to leasing equipment is that it gives the lessee the ability to avoid inflation. Lease payments are fixed and allow the lessee to pay for today’s equipment with tomorrow’s dollars. The financial performance of leased equipment often exceeds the amount of the lease payment.
Finally, leasing provides protection against obsolescence. Technology is always changing and with a lease agreement your customer can upgrade their equipment during the term of the lease. After an upgrade, it is easy to recast the lease terms to fit your budget.
Benefits to your business
In addition to all the benefits of leasing to your customer, there are also added benefits that directly help your business. When you offer financing, you have the ability to lock in your customer for a longer term and you lower the risk of losing customers with annual release clauses of maintenance agreements or just depending on customer loyalty for re-orders. Lease agreements make it more difficult for competitors to break into your accounts.
Consider this real-life example. We had a supplier share with us how one of his best customers had bought supplies from his company for more than seven years for 100 printers and typically placed large orders every two weeks. When an order had not been placed for a month, this supplier was shocked to learn that another company had included all the printers in a new lease agreement. You do not want to find yourself in his shoes and get locked out by the competition.
How to use leasing as a sales tool Leasing is just one more option you can give your customers; one more way to get them the equipment they need. Offering an affordable monthly payment up front offers less chance for price concessions. It is easier to say “yes” to $204 a month than to a $10,000 price tag for example.
Demonstrate added value by telling your customer about monthly cost savings or revenues realized by acquiring a new system or program offering such as increased productivity and more flexibility.
Lease financing programs are tailored to fit your customer’s needs. Popular programs include the zero down payment program, which offers no upfront costs; the seasonal payment program that matches the customer’s revenue cycle; the deferred programs that help meet budget constraints, and the step payment program that matches the timing of the customer’s revenue-generating ability.
Bundling the service and supplies with the equipment cost is a simple way to show the customer one simple payment and only one invoice. If you are offering a managed print services (MPS) agreement, you should be able to demonstrate cost savings with the lease agreement.
Lease types and purchase options The type of lease the customer chooses at the beginning of the lease determines what their options will be at the end of the lease.
Conditional sale lease agreements include a guaranteed or stated amount to lessor called a payment upon termination (PUT). The most common type is the $1 buyout. A conditional sale lease is usually chosen by a lessee for one of the following reasons:
• Because it is easier process than going through a bank.
• There are tax benefits/depreciation.
• They desire to have a stated amount to pay at the end.
• They plan to keep the equipment.
• They had a bad experience with leasing in the past.
• There are municipal restrictions.
At the end of the term there are no renewal payments. The customer is no longer billed monthly payments after the last payment is received. At the customer’s request, a bill of sale can be sent out.
Fair market value (FMV) lease is also known as a True Lease or an Operating Lease. With this type of agreement, the customer enjoys a lower payment. The payments may be treated as operating expenses and may be 100 percent deductible. This lease type offers the convenience to upgrade to new equipment and technology.
The end user (lessee) has four options with the FMV lease at the end of term:
• Buyout and keep for fair market value.
• Upgrade to new equipment.
• Return equipment at end of term.
• Do month-to-month renewals.
Rental agreement requires monthly payments for the use of equipment during a set period of time. These monthly payments may be recognized as rent expense since the equipment is being used rather than owned. The monthly payment commonly includes service, warranty, and training. Upon completion of the agreement, you can choose to renew, return, or upgrade.
The use of lease financing to your business is beneficial to you and your customers. Now is the time to make sure you have the appropriate financing options in place to protect your current customers and secure new business.