Leasing defined

A lease is a contractual arrangement in which a leasing company (lessor) gives a customer (lessee) right to use its equipment for a specified length of time (lease term) and specified payment (usually monthly). Depending on lease structure, at end of lease term customer can purchase, return, or continue to lease equipment. Leasing works for any type of business. Every imaginable type of organization leases throughout world including proprietorships, partnerships, corporations, and government agencies, religious and non-profit organizations. Over 80% of American businesses lease at least one of their equipment acquisitions and nearly 90% say they would choose to lease again.

Almost limitless possibilities

Your Company can lease anything associated with operations of your business including all types of capital equipment, hardware, software, and soft costs such as installation and consultation. Leases for large equipment such as container ships and passenger or cargo aircraft can also be arranged by professional companies such as Loanmarketeer or Ecapitalservices. Other than leasing military equipment to small countries with tin – pot dictators who happen to have delusions of grandeur, leasing is possible in all business equipment situations.

Leasing preserves vital credit and capital.

Leasing your equipment versus purchasing through a conventional bank loan makes better use of your money. Most business owners have wrongly been conditioned to believe that through purchasing equipment out right they are saving interest and finance charges.

Is a bank loan cheaper than leasing?

Banks charge lower interest rates than leasing companies, don’t they? Well, not exactly. That’s because rate per se, cost per thousand dollars of equipment per month or "interest rate" that is being factored into transaction, is an unimportant consideration. Far more important are terms and conditions of transaction. The terms of your "low rate" bank loan usually require that you keep some money, perhaps 20% to 30% of loan amount in a non-interest bearing account at that bank as "compensating balances" (so bank is really lending you 70 cents of their money and 30 cents of your own money for each loan dollar). When you compute real yield on that, you find that a five year 8% loan with a 30% compensating balance requirement is really about a 24% loan (because you’re paying interest on 100%, but only getting 70%). Using same formula, a 20% compensating balance requirement makes their yield on that 8% loan almost 18% and with a mere 10% compensating balance, it's still about 12.5%.

So you have this “low” bank rate, but you have to leave part of money in bank. You also have covenants that require you to maintain certain financial ratios, bank have filed a blanket lien against your assets and you are cross collateralized with your personal accounts, your kids’ trust accounts and everything else. There is probably a clause in loan agreement that says that if at any time bank feels uncomfortable with your industry they can call loan even if you have made every payment on time, and another that says they can increase their rate if their cost of money goes up. Oh, and they probably didn't want to finance entire cost, preferring that you made a down payment. In short, there are terms and conditions that you probably didn't know about and a rate effectively higher than you imagined. So it is pretty clear that “rate” is not only factor in making a decision on how to finance equipment. You have to look a lot deeper.

Another factor militating against bank financing and conventional ownership is that new technology is obsolescing everything that was “new technology” before, and that is something that is going to continue to happen in future... only faster. So, given that most equipment is going to be worth very little very soon, conventional financing becomes even less desirable.

It is use of equipment which generates profit, not ownership.

Cost Analyses

Here is a quick and easy way to estimate what a piece of equipment can actually cost using leasing and after tax costs. Since qualifying leases can be expensed directly, tax benefits are available sooner. Here is an example: 1. Determine equipment cost $89,900.00 2. Monthly Lease Payment (60 month lease*) $1977.00 3. Tax deduction (We’ll use 40% of gross**) $790.80 4. Deduct line 3 from line 2 to get net cost per month $1186.20 Now let's translate this into operating figures: 5. Divide by 22 business days*** to get net cost per day $53.92 Divide by 8 hours**** to get net cost per hour $6.74 Thus a $90,000 piece of equipment can really cost less than $7 an hour