Pool Builders Should Consider Leasing Equipment

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In a tight money market, equipment leasing can be an efficient way for a pool building company to diversify its financial structure, whether the business is a rapidly growing juggernaut or an established player in a mature market.

"Having an additional source of capital can help a lot in these times when banks are more restrictive and cautious in their lending," says Mary A. Redmond, a Kansas City-based equipment leasing consultant. "Depending on a single place for borrowing can stifle your growth."

Equipment leasing can also bring a certain measure of control over your company purse strings. "In an uncertain economy leasing can help preserve capital by providing 100 percent financing," says William G. Sutton, president of the Washington-based Equipment Leasing and Finance Association. "It also helps manage cash flow, since your future payments are specified."

Additionally, adds Sutton, leasing terms can be customized for the needs of individual lessees. "For example, you can structure a lease to reflect seasonal fluctuations in your business so that you make your payments during those months when more of your revenues are coming in."

Eager Providers

Loans are often declined out of a need to comply with regulations, notes John C. Deane, chief executive officer of The Alta Group, Reno, Nev. "Banks tell me they are eager or desperate to lend money because they have a lot of deposits and not a lot of loans. But they also have regulators setting quality criteria that the banks have to meet."

Sometimes when banks refuse to lend money, leasing companies will fill the gap because they look upon the leased equipment as collateral. And leasing firms that are tied closely to equipment suppliers have a vested interest in getting a deal done.

"Leasing programs organized around equipment vendors are intended to facilitate the sale of equipment," points out Deane. "As such, they tend to be much more focused on getting transactions done rather than on declining them, which can often happen with traditional loans in a tough market."

Such deals, sometimes referred to as 'vendor sales aid programs,' are either not tied to banks or are connected in such a way that the lender can be more flexible in putting together a transaction.

There's another reason why a leasing company may be more open to your business than a bank: The market for leased equipment has been soft as a result of the recent recession. The hesitation by companies to expand in an uncertain economy has led to a lot of unused capacity, putting downward pressure on rates.

"Equipment acquisitions in the business sector are anemic almost across the board," says Deane. "As a result leasing companies are eager to talk. And the rates and the terms can be pretty competitive."

The global low interest environment is also putting some downward pressure on leasing costs. For one thing, the cost to the leasing company of borrowing its own money is low. This can have a beneficial effect on the rates lessee customers are charged. Second, companies can borrow money fairly cheaply from a bank, provided they are credit worthy. This also puts downward pressure on leasing rates.

Once interest rates start moving higher, of course, the game will change. Equipment leasing companies typically report an upturn in business every time interest rates rise, and that can reduce the pressure to cut a deal.

Proving Worth

Eager as they are to strike a deal, leasing companies need to cover their own bases before they will sign the bottom line. "People think leasing companies will lease to a business that can't get a loan at a bank," says Redmond. "That is not always the case." Lessors need to protect their profits as much as companies in any other industry, and will look closely at the financials of any customer wishing to sign an equipment lease.

One reason for caution is the state of the economy and its effect on industry profits. Since the beginning of the recession, the leasing industry has experienced financial challenges not unlike those experienced by other industries. "The leasing companies themselves are still recovering from their own losses," notes Redmond. "The financial crisis and resulting bad debt have left them holding portfolios that are not as attractive as they used to be."

Negotiate Terms

While almost any aspect of the lease is negotiable, too often small business owners just scan the contracts and sign without trying to get better deals. "While it's been harder to get approved for a lease than it was before the Great Recession, once the leasing companies decide you are credit worthy they are often very open to negotiate the contract," says Redmond. Outside consultants and attorneys can more than pay for themselves in their knowledge and advice on where you can get the most benefit for the clauses negotiated.

"You need to be an informed consumer," says Redmond. "Be sure to review not just the master lease, but all of the paperwork necessary to finance the transaction." There are usually additional documents that change and override the master lease. They will be referred to in the master lease by titles as the "acceptance certificate" and the "equipment schedule" and the "stipulated loss value table." Reviewing these documents can obviate costly misunderstandings down the road.

The larger the deal, the greater the room for negotiation. While small ticket transactions of less than $250,000 or so are often looked upon as standardized, and not so much subject to negotiation, they can also be attractive. "The rates inherent in these programs are pretty competitive," says Deane.

Avoid Pitfalls

Lease structures should reflect the useful rather than the depreciable life of equipment. This is particularly important for equipment with a short useful life. Say, for example, you acquire some equipment with leasing terms of four or five years, but the equipment's useful life is only three years. You can end up being "upside down" in your lease, just as many homeowners today are upside down with their own mortgages. In other words, you owe more on the lease than the equipment is worth.

Your situation can become worse when you need to upgrade your equipment and end up adding the balance of your old lease onto a new lease. It's easy to dig yourself into a pit that way. "Once you get into that cycle you may never get out," says Redmond. "The only solution is to bite the bullet and pay off what you owe when the economy recovers."

Finding Quality

Maybe leasing firms are eager for customers, but check out any provider before signing the bottom line. For starters you want a company that is financially strong. The good news is that the equipment leasing industry came through the economic troubles in much better shape than other forms of lending. "On balance the industry has done much better than the mortgage industry on repayments. So most vendors with sales aid programs have not had significant problems," says Deane. (There are exceptions, such as those companies serving the construction industry.)

Furthermore, a good company does not guarantee a lease approval. "The best advice I can suggest is make sure you understand the terms and conditions of your contract," says Deane. "What are the costs? What are your responsibilities? Then it's not a bad idea to compare and contrast a couple alternatives."

Taking the time to do some homework can pay off in lower leasing costs and a higher bottom line. And the benefits of a great leasing deal extend beyond the dollars and cents value of a correctly structured contract. "A good leasing company will understand your market and your equipment needs," says Sutton. "Unlike a bank, a leasing company can be a valued consultant throughout the life cycle of your equipment."

Comments or thoughts on this article? Please e-mail [email protected].

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