Leasing For Dollars
Equipment Financing
Equipment financing is using the equipment you already own or intend to acquire as collateral for borrowing money. This is especially attractive to new equipment-hungry businesses just starting up. Because equipment is tangible personal property, it, like real estate, is attractive to certain lenders who want hard collateral as security for their loans.
At the heart of this type of finance is an agreement known as a lease, in which one party, the lessor, offers to rent a piece of equipment from another party, the lessee. When the deal is struck, the latter retains ownership but makes money from rent payments, the former gets to use the property and avoids the full cash cost of immediate purchase.
The traditional way of producing cash from equipment is buying it on an installment payment plan. The seller retains title until the buyer pays the full amount owed over a period of time, and if he fails to pay, the seller can repossess the equipment. In effect, the buyer takes possession and uses the equipment as collateral for the purchase money loan. For a business the equipment is an asset; the loan is a liability.
The second method of lease financing is to transfer title to equipment a business already owns to a lender, who rents it back to the selling company. This allows a cash-short business to convert equipment into available money, and still retain use of that equipment. While the business continues to enjoy use of the equipment, it cannot be counted as an asset.
There are many questions to be answered before you can make an intelligent decision regarding equipment leasing as a proper method of finance for your business, including tax considerations, the type of equipment involved, customary industry practices, and degree of cash need.
One of the most useful aspects of leasing equipment is that a business can borrow all of the cost of needed equipment, which releases capital for other business needs. Often the lease can be written to cover all incidental costs such as insurance, installation, or licensing fees -- and the lease will extend for the useful fife of the equipment. A lease can also allow you to upgrade equipment as technical innovations appear.
There are two major types of leases. The first is known as closed-end lease, in which the lessor retains ownership, providing all maintenance, repairs and replacements. The second is the open-end lease, allowing the lessor to purchase the equipment at the end of the lease, usually by paying off the balance owed after deducting rental payments.
There are numerous lenders willing to finance equipment leasing. They usually specialize by the type of equipment involved -- autos, trucks, aircraft, agricultural machinery, heavy industrial, and the like. Before Amtrak and Conrail put the government into the business, much of American railroad rolling stock was financed in this manner by major banks. You may have seen a metal plate affixed to a sleeping or dining car announcing its owner as the Chase Manhattan Bank.
Reporting Under the UCC
When secured financing is obtained, the applicable law governing the transaction is the Uniform Commercial Code (UCC), in effect with variations in all 50 states and the District of Columbia.
The UCC requires the filing of certain reports that act as public notice of the lender's secured interest in the property. These reports cover a period of five years (UCC- 1), longer than five years (UCC-3) or agreements where the borrower obtains title to the property at the end of the lease. Depending on the state and the type of collateral involved, reports are usually filed in the local courthouse where the debtor resides, where the equipment is located, or at the debtor's principal place of business.
Leasing Considerations
Obviously lease financing is best suited to equipment purchases, not to raising major amounts of capital for other business purposes. However, leasing may allow some reallocation of internal business funds to other purposes.
Since the money available under leasing arrangements is tied to the equipment it finances, there are several considerations about that equipment that will best determine your course of action; the reasonable length of time before obsolescence occurs; projected repair and maintenance costs; the equipment's likely residual value at the end of a lease; the possibility of using accelerated depreciation tax breaks; whether the equipment will really perform as you wish.
Answer these questions realistically and you can determine whether leasing is one of the ways to finance your business needs.