With the recent downturn in the economy, it's more important than ever for businesses to make smart money choices. Businesses that prospered during previous recessions always had two things in common: they were flexible and they were alert to new opportunities and methods. Such as leasing/ or financing the equipment they needed instead of buying it.
According to the Equipment Leasing & Finance Association, U.S. businesses lease/ finance every thing from laptop computers to commercial airplanes, racking up more than $600 billion in equipment financing each year. Although four out of five U.S. companies use leasing to acquire equipment, many don’t know understand the importance of picking a solid local finance partner.
Even in good times, a business must pay attention to the relationship between revenue and expenses. But maximizing the return on your up-front costs is especially important during a recession, when investment capital is harder to come by. Leasing the equipment you need strengthens your business while minimizing your expenses.
Better Uses For Cash
Business people are lulled into thinking that paying cash is a good way to acquire equipment because doing so avoids finance charges and interest expense and results in lower total cash outlay. In fact, paying cash can be the most expensive way to solve the problem.
There are two main reasons for this:
(a) Liquidity Is Critical. You must have reserves. This can become an outright survival issue when slow paying customers, slow sales or unexpected expenses put pressure on cash reserves. On payday, your employees do not want to know how many people owe you money.
(b) Alternative Uses Of Funds. If all you are going to do with the cash you conserve by leasing is to put in the bank at 3% or so, there wouldn’t be much benefit. BUT, there are so many other ways you can deploy your cash that offer huge potential returns.
Here are ten things you can do with cash which you probably can't do any other way:
- Build a cash reserve in case customers pay slowly.
- Book that big order and be able to pay for the raw materials to produce it.
- Take quantity buying opportunities.
- Get a bargain at an auction.
- Take cash discounts (2% each 10 days is a 72% return)
- Fund R & D projects.
- Fund new marketing programs.
- Hire your competitor's top salesperson.
- Buy your competitor.
- Invest in appreciating assets such as real estate.
Using equipment is what produces revenue or gains efficiencies, and you get to use it whether you lease, finance or pay cash.
Additionally equipment leasing offers many benefits to your business. If we are headed into a recession, you'll naturally want to cut costs and avoid new expenses, but if you cut too deeply into your ability to generate new income, this can actually hurt more than help. You don't want to miss out on that perfect contract because you no longer have the resources to handle it.
Equipment leases often require no down payment, further reducing your up-front costs. You pay for your equipment while it's generating income, not before. This leaves you more cash for other opportunities such as bulk discounts, or as a reserve against unexpected expenses. And because lease payments are usually considered an operating expense, they are often tax-deductible.
With the right finance partner, leasing the equipment you need is just as easy as renting a DVD. First, you should look for a finance partner in your geography whenever possible. Local partners provide hands-on advice, support and truly can structure the transaction that makes the most financial sense. By focusing on a few key aspects of the lease transaction, with a local partner, in turn can save a bundle on your next lease and eliminate potential aggravation. Make sure you find a finance professional that understands your business and will take the time to gather information. Typically a larger partner can offer better rates combined with more flexible lease terms.
A few years from now, someone will be telling potential investors, "while everyone else was stumbling during the recession, we actually prospered." You want that someone to be you.
RJ Grimshaw is Regional Lease Manager, Vice President of Key Equipment Finance. Key Equipment Finance (www.KEFonline.com) is one of the nation's largest bank-affiliated equipment leasing companies. Grimshaw has more than 10 years of leasing industry experience. He can be reached for questions at 315.470.5130
