Leasing Equipment May be Best Option for Businesses

When Ed Lynch determined he needed to buy a new drill, he knew it was going to cost him.

We’re not talking about a hand-held Black & Decker unit here but a giant, industrial Italian-made hammer drill, the kind that can deeply pound through tons of earth and concrete and costs nearly a half a million dollars. 

Lynch, the president of Titan Drilling, in Danvers, thought his options were limited. He could dip into his company’s capital account and buy the equipment outright. Or he could, more likely, talk to his banker about financing the purchase, which would probably still require a hefty outlay of cash for the down payment and possibly a very high loan-to-value ratio.

Although his company had rented-to-own equipment, there was another option that he didn’t consider until he had that conversation with his banker: leasing. 

“I bought my first piece of equipment when I started my business with a typical term loan and it ended up costing me a lot money,” he said. “Cash flow is everything in this business but I just hadn’t thought much about leasing.”

It was his banker at Rockland Trust that showed him the light and arranged the lease agreement that provided 100 percent financing. The drill was in service within several weeks and is now about to start pounding away at a commercial development in Queens, NY.

“It turned out leasing was a no-brainer,” Lynch says. “The payment terms were good and I think it’s going to cost me about half as much as a regular term loan.”

Turning to a consumer bank to arrange a heavy equipment lease is a relatively new trend as financial institutions explore ways to keep their business customers in the fold for all their business needs, including plant and equipment leasing.

“We looked at our customer relationships and noticed that a lot of them were leasing equipment,” said George Couto, vice president of business banking and leasing at Rockland Trust. “So we investigated ways to enter that business so we could strengthen our relationships and offer them leasing as another service we could provide.”

Typically, Couto said, banks would not consider 100 percent financing on equipment leasing because of the relatively high risk. However, with the newly established leasing company, the bank can offer this attractive financing option. The customer interacts solely with their relationship manager at the bank, which handles all credit approvals, pricing, and funding.

“We’re relatively new in the program and there isn’t a high realization that we can offer this option tour commercial customers,” said Couto. “They may have a line of credit or a mortgage, but didn’t know we could offer a lease option. As with Titan Drilling, we can now offer more options and give them 80 percent financing on a typical term loan, or 100 percent financing on a lease.”

The equipment leasing business is a $250 billion sector, according to the Equipment Leasing and Finance Association (ELFA), and about one-third of all commercial equipment acquisitions are done through leasing as nearly 80 percent of commercial companies avail themselves of the option at some time. Though the business has slowed in recent years, as construction and business expansion reacts to economic conditions, the outlook, according to experts, is positive. 

Leasing has been around for generations, of course. Technology, transportation, construction, energy, medical, and other companies with heavy equipment needs are the most likely to turn to leasing.

“There’s this incorrect preconceived notion that companies turn to leasing when they have bad credit,” said Marc Pettine, of Rockland Trust Leasing, and a 24-year veteran in the leasing industry. “That’s simply not the case. We’re trying to educate the customer that leasing is just another way to finance their needed equipment.”

Pettine says a common reaction from consumers when offered a leasing option is they say they “want to own, not lease,” comparing it to a typical auto lease.

“That tells us they’re thinking they would use the equipment for a three-year period and then return it,” Pettine said. “We can provide lease options where they retain ownership and at the end of the lease they can exercise a dollar purchase option and keep the depreciation benefits and, of course, they have the benefit of 100 percent financing.”

The ELFA developed a five-stage checklist for companies to get started on leasing equipment for strategic advantages.

1. Consider how you will be using the equipment - Determine how your company will use the equipment and the length of time you’ll need it. To help decide if leasing is a profitable financing option for you, perform a simple cost/benefit analysis by comparing the anticipated costs to the revenue you expect to generate from using the equipment.

2. Find a finance partner who understands your business - The company’s understanding of market fluctuations and other factors that impact your business can greatly affect the successful outcome and desirability of your lease contract. It is also important for the company to understand your business’ tax and cash flow requirements and be able to set the residual rates (the value of leased equipment at the end of the lease term). Your equipment financier can serve as a valued consultant, providing additional benefits through life cycle asset management solutions. 

3. Calculate your total payments and costs - Review the number of payments you will owe, the total monthly payment due, and any additional costs related to insurance, taxes, and other charges. In addition, find out if there are additional costs associated with the lease that may occur during the course of the agreement term, including late payment fees and other surcharges.

4. Understand the terms of your agreement - Review the provisions of the agreement with your financial representative. Make sure you understand your company’s liability for the equipment you are leasing and consider questions such as:

• Who assumes the costs for the equipment’s insurance, taxes, and maintenance?
• Who has obligation of installation, maintenance, asset management, tracking, and other services?
• How can you upgrade or add equipment under this agreement?
• What are your options at the end of the agreement?
• What procedures must you follow if you choose to return the equipment?
• Are there any extra costs at the end of the agreement?

5. Close the deal - once you have answered key questions and determined that equipment leasing or finance can benefit your company.

Perhaps the most surprising element of the leasing process was the speed with which it could be accomplished, said Titan’s Lynch. 

“I had expected weeks and weeks of documentation, visits, calls,” he said. “I think we did the whole thing in 10 days with a visit and a couple of calls. It was amazing.”