By Ramez Halteh and Mark Thomas
Updated, efficient equipment is vital to the success of most businesses but acquiring equipment can be daunting even under the best of circumstances. Add to this a worldwide pandemic and economic uncertainty and many business leaders find themselves in unchartered territory when it comes to equipment acquisition.
Business growth and stability pose a dilemma — especially in the midst of volatile markets and escalating concerns about capital. There’s no question that leading-edge technology, timing and scalability play key roles in an organization’s assets. However, the ways in which you choose to pay for new equipment and technology may vary according to your business objectives. For many, equipment leasing is a viable option, especially when factors like cash flow, equipment flexibility and tax implications are considered as part of the decision-making process.
Immediate Access to a Strategic Tool
Especially in times of constrained capital resources, it’s essential to note that equipment financing is available right now, typically with no advance payment required. Further, financing offers unmatched flexibility. Through customized structures and a variety of payment plans and terms, financing can be a powerful tool to support growth in current conditions and beyond. Let’s take a closer look at these three features and other points to consider about equipment financing:
1. Retain business capital and stay nimble. Foremost, strategic equipment financing may help to retain your organization’s agility without depleting cash, capital reserves or third-party lines of credit. Payment plans allow you to acquire the assets you need now and generate revenue while you pay for them over time.
2. Unparalleled flexibility. Customized structures can be tailored to accommodate your current budget requirements and longer-term goals. For example, you can match your payments to seasonal revenue cycles, anticipated growth or unexpected pivot goals. Leasing also allows you to bundle equipment and related expenses like software, delivery and training into a single payment plan, which can increase efficiency and improve forecasting.
3. Enhanced cash flow. By preserving cash and taking advantage of historically low interest rates, organizations are able to use equipment financing to support financial stability and continuity. In a tough economy, it’s important to keep sufficient cash on hand for unforeseen expenses and liabilities — or to adapt to changing market conditions as illustrated in the following example.
The Power of Liquidity Management
A lease can leave capital reserves intact — free to use for other investments and improvements, or to help you pivot quickly when unexpected events impact your organization or the broader economy.
Large capital outlays for equipment can present financial risk for business leaders to evaluate and manage. Equipment financing can help an organization manage the uncertainty of investing in equipment that contributes to achieving business goals and adjust cash spending for other needs.
Sample Scenario — Lease Versus Purchase Comparison
Using fictitious figures, the following sample scenario illustrates how financing equipment can enhance cash flow, free capital reserves and support changing business needs in a fluctuating economy:
Suppose two similar companies each sought to acquire new equipment with a market value of $5 million in January 2021 to meet projected business needs. Company A purchased the equipment with $5 million from its reserves and Company B entered into a customized lease to finance its use of the equipment over time.
Company A immediately reduced its available cash reserves by $5 million. Company B financed the equipment and maintenance costs over the useful life of the asset, resulting in monthly payments of $75,000 or $900,000 over the first 12 months.
If Company B pursued a lease payment structure while seasonality and unexpected economic events impacted its business, the potential impact on its liquidity due to changing market conditions may have been less.
If both companies faced significant, unexpected liquidity needs during the year, Company A may find itself less nimble because $5 million was spent upfront for its equipment. In contrast, Company B remains positioned well to sustain its current operations, adjust cash spending for other needs and adapt its business model to 2022 and beyond market conditions because it retained approximately $4 million in cash reserves that first year. Moreover, depending on lease terms and conditions, the ability to upgrade mid-term or return the equipment may be available and position Company B to continue to scale its business while reducing the risk of equipment obsolescence.
Fluid Management, Maximum Control
In an uncertain economy, most business owners opt for maximum control of capital equipment acquisition, use and disposition. Financing can help shape that strategy. With mid-term upgrades and the option to renew the lease, purchase the equipment, or return assets at the end of the term, the risk of owning obsolete equipment is lessened substantially.
Tax Appetite and Depreciation
For many organizations, asset depreciation plays an important role in fiscal management. In fact, most equipment offers depreciation benefits. However, determining whether your organization can use all the depreciation requires consideration — especially true for equipment-intensive businesses.
Taxpayers who need depreciation’s sheltering effect may benefit from being the tax owners of equipment. You can accomplish this with a loan, installment payment agreement and some leases. However, on an after-tax cost basis, organizations that cannot fully utilize tax depreciation (or those subject to interest expense limitations) may find a tax lease more efficient.
Why a Tax Lease?
When compared to a traditional loan, tax leases typically provide favorable cash flows because the lessor monetizes depreciation and a residual investment in the form of a lower monthly payment. Tax leases also may allow the entire lease payment to be deducted as an operating expense on the business’s tax return — a potentially critical consideration for organizations that wish to extend tax deductions over longer time periods.
Why Financing Matters Now
Remember that equipment financing can be a strategic tool: It lets you acquire and employ assets immediately and develop a plan to achieve long-term goals. In fact, few if any other payment options offer financing’s wide range of benefits and flexibility. In addition, though current economic conditions have negatively impacted many organizations, financing is a powerful source of alternative capital, available now.
Finally, before beginning to acquire new equipment or assessing existing equipment, it’s essential to seek an equipment-financing professional who has industry expertise, a proven track record in lease structuring and a clear understanding of the organization’s goals.
Together, you can begin to create a strategy to optimize assets and opportunities, both today and in the future.
Ramez Halteh is senior vice president of business banking for KeyBank in Utah. Mark Thomas is senior vice president, West Region sales director for Key Equipment Finance.
This material is designed to provide general information only and is not comprehensive nor is it legal, accounting, or tax advice. KeyBank does not make any warranties regarding the results obtained from the use of this information. Credit products are subject to credit approval, terms, conditions, and availability and subject to change.