Leveraging leasing to increase profitability

Office World News, Jun 2000 by Fleming, Michael J

As technology continues to change, businesses must learn to adapt in order to grow.

One way businesses can ensure growth is to leverage leasing as a cash management tool. Those companies that lease their equipment will avoid falling victim to technological obsolescence and in fact, gain an advantage over their competitors who do not lease equipment.

Leasing is an ever-growing financing option for many types of equipment in a variety of industries. The Equipment Leasing and Finance Foundation commissioned Financial Institutions Consulting (FIC) to conduct a competitive trends analysis of the leasing industry to gain insight into the current leasing market, as well as the implications for the future.

The leasing industry serves companies committed to steady yearly growth. The common factor that exists in such businesses is the strategic use of leasing to increase profitability.

"In order to build our start-up operation, we needed to lease a lot of equipment," Ibrahim Mardam-Bey, CFO of ATCALL, a full-service telecommunications company said. "Working with leasing companies allowed us to conserve the cash that we needed to allocate to other resources, and that really gave us the big push to grow as we have."

Leasing offers strategic cash flow benefits, including 1) a lease requires no down payment and finances only the value of the equipment expected to be depleted during the lease term. The leasee usually has an option to buy the equipment for its remaining value at lease end; and 2) leased assets are expensed when the lease is an operating lease. Such assets do not appear on the balance sheet, which can improve financial rations.

LEASING TECHNOLOGY

As evidenced by companies such as ATCALL, one of the fastest growing segments of the leasing industry is the information technology (IT) equipment market. This segment presents the greatest opportunity for increasing leasing penetration and volume growth. In 1998, the computer equipment market demonstrated remarkable growth, exceeding the industry average. Computer software experienced the highest growth at 465 percent.

Mainframes and PC Network equipment experienced growth percentages of 161 and 149, respectively. According to the Equipment Leasing Association's (ELA) annual Survey of Industry Activity (SIA), which provides a comprehensive look at the $207 billion leasing industry and tracks major performance measures for leasing operadons, the computer leasing equipment industry represented almost 19 percent of new leasing business volume. This percentage will only increase as technological equipment becomes obsolete at ever-increasing rates. This rapid rate of obsolescence will encourage more companies to lease rather than purchase what may soon be outdated equipment.

LEAsING INCREASES PROFITABILITY Leasing offers a valuable financing package that allows companies to maximize their purchasing power.

Business owners rely on equipment every day to operate and grow their business. But the value of the equipment comes from using it, not owning it. By leasing, a company may transfer the uncertainties and risks of equipment ownership to the lessor, which allows it 't' concentrate on using the equipment as a productive part of the business. Corporations can pay for the equipment as they use it. In essence, equipment earns its own way.

In addition, a lease allows the enduser to tra4fer all risk of obsolescence to the lessor as there is no obligation to own the equipment at the end of the lease.

"A customer that buys a piece of equipment is going to be responsible for 100 percent of the cost, plus all the carrying costs that come with it," John Kenning, Comdisco's president of the Communications Capital Division said. "However, with an operating lease, a customer is only paying 90 percent of the acquisition costs for the equipment and they can map the term to the useful life of the equipment.

THE BOTTOm LINE

"The companies that lease technological equipment from us understand that leasing is flexible and can be used as a cash management tool," Kenning said. "Leasing allows them to upgrade their infrastructure while freeing up their capital to invest in other areas and therefore, increase their profitability."

Technology is changing at a rapid pace. To remain competitive, companies must keep in line with their rivals. But to succeed, companies must continue to grow at a rate faster than their competitors. By leasing technological equipment, companies can conserve their cash and increase their profitability. Increasing profitability equals success.

EDITOR'S NOTES: Michael J. Fleming is the president of the Equipment Leasing Association of America (ELA). ELA, a nonprofit organization headquartered in Arlington, Va., representing more than 800 member companies, which provide a variety of asset-based financial products, primarily equipment leasing.