Lease is more: equipment leasing companies are flush with cash - and they want your business

Entrepreneur, August, 1998 by David R. Evanson, Art Beroff

If your credit score comes up low, most leasing companies will take steps to make the deal doable. "In the trade, we call this structuring," Lahti says.

Popular structuring strategies include down payments on equipment; additional guarantors; and putting up additional collateral in the form of real estate, publicly traded stock, letters of credit and equipment a company already has. "If you already have equipment on your floor, that's equity," says Lahti. "You can use it as additional collateral. In fact, if you need working capital, we can buy your equipment and lease it back to you."

SCORING THE LEASE

In theory, there is no interest associated with a lease. "You write the whole lease payment off, just like any other monthly expense," Lahti says. With a bank loan, on the other hand, you write off just the interest portion of the payment and take an expense for the depreciation of the underlying equipment.

Still, you may want to gauge the cost of lease financing. To do this, you must know the residual value of the equipment you're leasing. This is the value of the equipment at the end of the lease that you would have to pay to purchase it. For instance, suppose you lease a $12,000 forklift for $300 per month for three years, and at the end of the lease, the forklift's residual value is $4,000. If you then buy the forklift, your total cash outlay would be $14,800 (36 payments of $300, plus $4,000). Because the forklift cost just $12,000 new, the difference between the original price and the total cash outlay is the implied financing cost - in this case, $2,800.

If you decide to go with a leasing company, such an analysis is a good starting point, but other factors must also be analyzed when comparing one leasing company to another: namely, the upgrade value, the flexibility to extend or modify a lease, interim rent payments, search and documentation fees, and speed of approval.

LET'S MAKE A DEAL

Although it's not apparent at first glance, the company offering the lease financing is often not the same one that's selling the equipment. Generally, the equipment seller will refer you to a leasing company with which it does business. Lahti advises you to get a quote from the leasing firm the company refers you to and then get another quote to judge the competitiveness of the first quote. "Get a second referral from the equipment seller," says Lahti, "or ask a friend or business associate."

If you look for a leasing company on your own, Lahti says, you should understand whether you're talking to a broker, who simply structures deals and gets them financed through any of the leasing companies he or she works with, or a leasing company, which puts its own funds on the line.

There's nothing wrong with using brokers, says Lahti. The situation is analogous to using an insurance broker, who finds the best deal for a client among many insurers and, at least in theory, generates savings in excess of his or her fees. But with brokers, as with many other professionals, the same advice applies: Buyer beware.