DAILY NEWS Jan 27, 2014 5:46 AM - 0 comments

Lease versus buy for industrial equipment

Business conditions and low rates give financing an edge.

TEXT SIZE bigger text smaller text
2014-01-27

Paying for equipment outright versus opting to finance can be a complex decision, given tax and accounting impacts, financial considerations, and changing business conditions.

Manufacturers struggling with the dilemma should ask themselves a simple question—how can they put their available cash to the best possible use? That’s the suggestion Debrah Menashy, corporate account executive with Enable Capital Corp. (Toronto) usually gives her clients.

For more than 14 years, Menashy has worked in leasing and financing for companies ranging from small industrial shops to national corporations. While leasing isn’t for everyone, she’s noticed a surge in interest for a variety of reasons—low interest rates, less hassle compared to traditional lending, and the craving to hang on to capital.

“Everybody has this fear of not having enough cash in the bank right now,” Menashy says. “They want more of a rainy day fund than they used to have. There’s also seasonality in some of these businesses so they want to keep the cash in place for those off-peak times.”

Using cash wisely

The key is figuring out how to get the best return on cash. Is the money better spent on a lump-sum investment in a machine, or kept in the bank for payroll, consumables and unforeseen expenses?

“Some companies may want to use their cash mainly for accounts payables and inventory, because that’s where they get the best margins of return,” she explains.

Enable Capital—an asset-based financing firm known for taking on transactions traditional lenders won’t entertain—uses neutral Rubicon software to take clients through the various lease versus buy scenarios. By changing tax variables and terms, manufacturers can easily grasp the best type of leasing structure for their new, used or upgraded equipment.

“It’s a bit of an education because a CFO or VP of finance has to know a lot about financials and running a company, but many of them touch leases only every five years. We do it all day long so we try to be a resource to help them go through the various options,” Menashy says.

Less hassle and paperwork

One common mistake she’s noticed is the tendency to focus on the lending rate alone. Traditional sources of finance, such as banks, may offer what appears to be an unbeatable rate, but manufacturers should ask about annual fees, along with monthly reporting requirements.

“That’s going to cost your employees office time,” she cautions. Traditional lenders might also attach covenants to the loan, resulting in further restrictions.

By contrast, leasing affords “quiet enjoyment” of the asset, she says, explaining once the machine or equipment is in place, the manufacturer is free to focus on filling orders—not on administrative paperwork.

Leasing usually lowers the total cost of ownership, she adds. A piece of equipment costing $100,000 will take up to seven years to write off if purchased. But the total lease payments can be written off in each fiscal year as a business expense.

“It’s usually more cost effective to lease than to use your own cash,” she says. It can also be more efficient to upgrade or change machinery as business needs evolve. Purchasing power increases as well.

A manufacturer with limited access to cash or credit might feel they have to settle for a cheaper piece of machinery that doesn’t quite meet their needs. With leasing, they can install the right machine for the job.

That said, she’s advised against leasing for some clients, after assessing their financials, access to credit and business plans.

It’s definitely not one size fits all, so Menashy likes to learn about her clients’ longer-term objectives, to map out a solid formula for cash security, access to capital, and the lowest possible equipment costs.

Debrah Menashy, an invited speaker on industrial leasing and financing, is corporate account executive with Enable Capital Corp. of Toronto. Contact Menashy with any questions at debrah@bluechipleasing.com  or (416) 614-9237 (ext. 272), or visit Enable Capital Corp. at http://www.enablecapitalcorp.com.



Horizontal ruler
Horizontal Ruler

Post A Comment

Disclaimer
Note: By submitting your comments you acknowledge that MRO Magazine has the right to reproduce, broadcast and publicize those comments or any part thereof in any manner whatsoever. Please note that due to the volume of e-mails we receive, not all comments will be published and those that are published will not be edited. However, all will be carefully read, considered and appreciated.

Your Name (this will appear with your post) *

Email Address (will not be published) *

Comments *



* mandatory fields