Is Equipment Sale and Leaseback Right for You?
Financing your business – the options are yours
 But the silver lining may be assets you already own

By Alan Corbet

      When business is ready for growth, access to capital can’t wait. The stock market is currently volatile and the sub-prime lending scandal is placing even more constraints on access to capital. Banks and other financial institutions are tightening their belts, but small businesses cannot wait for the financial sector to figure out a new strategy for credit.

      Banks have always been a source of capital, but there are others available as well. Options include outside investors, pledging your personal collateral for loans or a new partner who can inject cash. Picking the right source of capital is a challenge.
     
Leasing Options
      Businesses, however, may already have access to capital without taking on more debt. The answer may be sale and leasebacks.

      Leasing new equipment has been popular, as many companies have seen the benefits of leasing rather than buying. Lease payments create the same kind of obligation that interest payments on debt create, but financing doesn’t usually allow a purchase at 100 percent of the value. Rather, only a portion of the value (typically between 50-75 percent) is allowed. Leasing back your own assets has been an avenue for many businesses with their owned real estate, but equipment can also be an option. Business-owned assets generate needed capital without losing the usefulness of the equipment. What’s important is how you go about securing the money you need.
     
Making Capital Work for You
      Every business large and small has limited resources when it comes to capital. For small businesses, limited capital resources are a reality. Big businesses recognize that tying up capital in equipment ownership is usually not where their money will work hardest for them, i.e., a retailer typically works their capital hardest in inventory; for a smaller service business, maybe the best use of capital would be an additional sales person or a marketing program. You have to analyze the best use of your capital and plan accordingly.

      Managing profits and what to do with them is critical for the future. Last year’s accumulated profits are usually buying this year’s equipment. In most cases, leased equipment pays its own payment through increased efficiency, thus leading to cost savings and increased profits. This is just another reminder of how important cash is to any business. Cash is still king and critical to your success.

      But the job of financing growth can sometimes be more daunting than funding the launch of a business. As with securing start-up funding, going after money for growth requires you to have your financial house in order. The business’ own credit rating will play a factor in how much cash can be accessed, but lease payments can be tax advantageous. For instance, the IRS has established that computers have a “useful life” of five years. That is, if a customer acquires a computer and capitalizes and depreciates it, it will be five years before all of the tax benefits are realized. In the case of a lease on that computer, every dollar paid out on lease payments this year gets written off as a tax deductible operating expense this year.
     
Do Your Research
      If you consider financing new or even pre-owned equipment, the alternative sources of financing will want key information. Listed here is just a short list of what you should gather as you begin to research potential leasing partners:

• Date of purchase
• Extent of use, i.e., single shift, double shift, triple shift
• Whether the asset is for general purpose or special purpose
• Repairs and maintenance policy of the business
• Availability of spares in the future, mainly in the case of imported machines
• Future demand for the product manufactured by the asset
• The life of the asset if it is part of bigger fixed asset

      As banks tighten their belts because of woes in the real estate market, their credit-lending decisions are going to become more conservative, which will affect access to loans for financing new growth. Financing your owned equipment through a sales leaseback can usually garner a 100 percent value of the equipment.

      Before jumping into a sale-leaseback transaction, the basics still apply: plan, plan, plan. Is your company’s business plan up to date? Was the original plan done last year or five years ago? A business plan must include all the factors of a successful business, including how you will access capital.

      It still goes without saying: Never take on debt or additional obligations unless they are warranted. However, seeking the right source for capital is pivotal to long-term success.
     
Alan Corbet is an accountant for employee health benefits with Metzler Bros. Insurance. You can reach him at (816) 421-6116 or .