Comprehensive Benefits to be Gained by Leasing
Once the decision to upgrade or add equipment has been made, there are three basic alternatives when paying for the acquisition. Pay cash, borrow money in the form of a loan or line of credit, or lease. Chances are, leasing is your best bet. Here's why:
Leasing Overcomes Budget Restrictions
When a new piece of equipment can increase productivity, reduce costs, or help you access new markets, you want to enjoy those benefits as soon as possible. Waiting until you have accumulated sufficient cash to purchase may slow your firm's growth and cause you to miss out on opportunities for new revenues and profits.
Leasing lets you profit right away, instead of waiting until you have the capital to purchase equipment outright. The cost of postponing the acquisition of needed equipment may also be expensive in terms of lower productivity and efficiency, lost revenues, rental costs, future price increases, and/or excessive down time and repair costs due to equipment breakdown. Often, lease payments for new equipment will be less than the added revenue or reduced expenses your company will enjoy.
Larger organizations may also have additional problems with capital budget limitations and/or bureaucratic procedures for purchasing. Leasing can convert the purchase to an operating expense, which can be more readily justified against the benefits the equipment will produce.
Leasing Conserves Working Capital
A business decision to add new equipment is invariably driven by the profit motive. When you purchase new equipment, your cash is tied up in depreciating assets. You lose the potential profits and returns you could gain by investing in other areas of the business. Leasing lets you get the equipment you need while still keeping your working capital available for other uses, or on reserve for unexpected expenses. Click here to review other possible uses for operating capital. Before you purchase new equipment you should consider how leasing may help you achieve a better overall return on investment.
Leasing Preserves Credit Lines
Credit lines are normally intended for short term operating capital needs. Lenders structure credit lines to lower their risk exposure and for this reason, borrowing rates on credit lines are often one of the lowest cost sources of capital. It can be tempting to use credit lines for equipment purchases, but a business should also consider the disadvantages.
Using short-term credit facilities to finance fixed assets can impair a business' ability to respond quickly to new opportunites, or lessen the impact of unexpected economic setbacks. Trying to increase a credit line at the last minute may not be possible, and rather than providing assistance, your banker may view such situations as a reason to limit or cancel your credit facilities. Businesses with seasonal cash flows can be especially at risk.
Leasing your equipment is often a better choice, as it more closely matches repayment to the revenues and profits produced. It also tends to balance cash flows over the equipment's intended useful life. Leasing keeps your short-term credit facilities available for their intended purposes and increases your flexibility to be competitive. Click here to review other possible uses for credit lines.
Leasing Provides 100%+ Financing
Incidental costs associated with the acquisition or new equipment can really add up. Software, special tools or accessories, sales taxes, installation & delivery expenses, training and setup costs may be involved and can dramatically increase the real investment required for new equipment. Most financing arrangements will require a down payment and the inclusion of these "extras" may not be permitted.
By leasing the equipment through Westport, the down payment can usually be avoided and we can often allow the extras to be included as well. Even the payment of sales taxes is spread over the life of the lease term. This helps to make the total equipment package more affordable.
Leasing is Quick and Convenient
Arranging equipment financing doesn't have to be tedious and time consuming. Westport's lease procedures are fast and convenient. Applications may be submitted by phone, fax, or on-line. (Click here to apply on-line.) Many applications are approved within minutes while others may take from one to two days. Our documentation process is also fast and simple, so you can get your new equipment quickly and can stay focused on the business at hand.
Leasing Simplifies Budgeting
Uncertainty as to whether necessary capital will be available to accommodate future purchases can make planning for equipment replacements and upgrades a challenge. Floating rate financing makes future payments subject to changes and can further complicate budgeting and forecasting.
Westport's leasing plans provide a fixed future payment schedule, allowing you to accurately budget for equipment costs. Benefits provided by new equipment can offset the lease payments making it easier to justify the acquisitions planned in your budget.
Leasing Avoids Obsolescence
When companies purchase equipment, they often keep it long past the optimal point of its useful life. They avoid having to come up with additional capital for an upgrade. In doing so, they lose productivity benefits that could be gained by upgrading, and equity value in the asset is diminished as trade-in values decline.
If the nature of your industry demands that you have the latest technology in order to remain competitive, leasing is a smart choice. Westport's programs make it easier and more affordable to upgrade to new equipment on a more regular basis. Leased equipment can be upgraded during the lease term or at expiry. A lease program also implements a structured long-term budget and plan for the replacement of equipment, ensuring that the company remains technologically current and one step ahead of competitors.
Leasing Puts Inflation To Work For You
Every year the purchasing power of a dollar declines. While this may be a cause for concern when considering the future value of savings, there are ways to use inflation to your advantage. The fixed regular payments of a lease mean that future payments are paid with tomorrow's less valuable dollar. This hedging strategy essentially lowers the cost of the leased equipment as time progresses.
Leasing Offers Potential Tax Benefits
When equipment is purchased, the investment comes from profits that remain after taxes have been deducted. Depreciation expenses may be claimed each year to offset the cost of investment against revenues, and reduce the amount of income tax payable. However, usually only a small percentage of the investment may be claimed each year and the equipment may be obsolete long before the original investment is fully amortized. A portion of the original investment may never be written-off to reduce taxes.
Leasing your equipment works differently. Depending on your circumstances and lease structure, you may claim periodic lease payments as an allowable business expense, similar to office rental, employee salaries, telephone expenses, etc., to lower income taxes payable. In effect you are purchasing equipment with "Pre-Tax Dollars". The deductions are usually greater than what would be allowed under the government's capital cost allowance schedules. By accelerating the recovery of your investment in equipment and deferring income taxes payable, net return on investment may be increased.
Leasing Offers Flexible Payment Options
Your company may require the same type of equipment as other businesses, but your usage, cash flow, and objectives may be unique. Westport recognizes that each organization is faced with different circumstances and offers options and alternatives to suit virtually every requirement.
Businesses who need new equipment now, but are faced with a temporary cash flow shortage may benefit from a "Deferred" lease where payments do not start right away. Businesses with seasonal cash flows may want higher payments during some months, with smaller or no payments during slow months. A "Skip" lease can be of benefit to those clients. Lease agreements can be structured to have payments increase or decrease during the term with a "Step" lease.
Leases may be structured with a residual value at the end of the lease to reduce regular payments, or may fully amortize the purchase price over the term to make purchasing simple and convenient. Your Westport representative will discuss your objectives and options to ensure you get the lease plan which best meets your needs.
Leasing Offers Competitive Rates
In many cases there are extra fees or special requirements that make other financing programs more expensive than they appear. Westport's lease plans include and clearly state the entire cost to the client. We have always offered leasing programs that are highly competitive when compared to other market alternatives. Our policy of pricing to risk ensures that each client receives a lease plan which will be of equal or better value than other financing options available to that client. In many cases the after-tax cost of our lease program is substantially lower than the available alternatives.
Click here to learn more about comparisons between our lease programs and bank financing alternatives.
Leasing Avoids Restrictions On Future Borrowing
Other forms of financing often include restrictive covenants, preventing the borrower from entering into additional financing arrangements. Lenders may also look for additional security and request that other assets be pledged as collateral. This can make it harder to get financing from other sources in future because the company's assets are already secured.
A lease agreement relates solely to the leased assets and the periodic lease payments. Westport uses the equipment and the company's payment promise as the only collateral. We do not ask for other assets to be pledged as security, and we will not restrict a client's future growth by including clauses restricting other future financing.
Leasing Simplifies Accounting and Cost Allocation
Capital expenditures require depreciation schedules, additional tax records, and other accounting measures to accurately gauge the costs and benefits of an equipment purchase. In addition, it can be difficult to demonstrate the true nature or intention of a capital purchase. For example, an investment in equipment for an employee fitness center may be a good way to improve employee moral and productivity, and reduce days lost for health reasons. But the equipment will be reported as a fixed asset and possibly a corresponding liability in the financial statements.
By leasing the equipment, the expense could be more accurately categorized and reported as a payroll cost or employee benefit. The accounting entries and procedures are simplified as well because only a simple monthly expense needs to be recorded.
Leasing Provides Protection From Future Increases In Bank Rates
When bank interest rates rise, the costs for short-term credit facilities, such as lines of credit, increase immediately. Bank term loans which have floating or adjustable rates will also increase. Such increases will have a negative effect on the cost of doing business and will reduce profitability. When rates are increasing due to a general economic downturn, declining sales are also likely to occur. Where all financing has been arranged on a floating rate basis, this situation could potentially cause the failure of the business. Growing companies are particularly vulnerable.
Leasing your equipment is a hedge against rising interest rates as the payment schedule is determined and fixed at the start of the lease. The "rate" is locked in for the term of lease and will not increase even if bank rates jump dramatically. This feature leasing similar to taking out "interest insurance can be valuable protection a volatile economic environment.
Leasing Can Be Easier To Qualify For Than Loans
Traditional lenders usually look for an applicant's capacity to pay back an obligation, the additional collateral they have to reduce the lender's risk, and how the applicant has handled previous credit situations. Lending officers are usually generalists with no specific industry assignment or experience.
Lessors tend to be more experienced with specific industries and assets. They are familiar with the market values of equipment and better understand the characteristics unique to businesses in certain industries. They may understand or overlook aspects of an application which would cause concern for a traditional lender. Many small ticket leases are arranged without the need for a review of the client's financial statements, tax returns, cash flow projections, or a business plan. It should be noted that traditional lenders and leasing companies alike, shy away from applicants with a derogatory past credit history. For guidelines on what is required to qualify for lease financing,click here. For information on how to establish and maintain a good credit record, click here.
Leasing Can Improve Financial Reporting
By taking on more debt to acquire new equipment, a company may affect the ratios reported on their financial statements. Often these ratios are standards that determine whether or not a company qualifies for additional financing, or how much of a risk they present to the lender. A higher level of debt may make it difficult for a growing company to get additional financing in future, or they may be forced to pay a higher rate, which increases their costs and reduces their profitability. This in turn affects other ratios, which again affects their future capacity to borrow.
Leasing the equipment may be an option to get the financing off the balance sheet, or to improve the ratios so that future financing is possible from traditional sources at more favorable rates.
Leasing Preserves Shareholder Equity
When a company has pressing needs for new capital equipment and issues more shares or turns to outside equity investors to raise the necessary funds, future earnings will be diluted. The return the original shareholders will receive may be substantially less than what they would have received had they been able to avoid issuing more shares.
If the new equipment is going to provide future revenues, leasing the equipment may provide an alternative that avoids the sharing of all future earnings. In effect, the needed investment capital comes from the lease and the future earnings the equipment will generate.
Leasing Establishes An Additional Credit Reference
Younger and growing companies should be proactive in establishing a profile which will make future borrowing easier and less expensive. Improved financial statements are important, but there are other considerations as well. Lenders will look at the trade references and credit history for a company to help determine credit risk. A company that has done all of their financing solely through their bank may have difficulties if that relationship deteriorates. Especially if the bank refuses to provide a credit reference.
By leasing equipment, you achieve credit diversification. This can be a benefit for a growing business with demand for capital from a variety of lenders. More credit references to support future applications can improve the chance of getting needed financing, and getting it at more favorable terms. For information on how to establish and maintain a good credit record, click here.
Leasing Reduces The Impact Of Sales Taxes
Depending on the jurisdiction, sales taxes can increase the investment required for new equipment by 15% or more. In most lease situations however, sales taxes are collected with each periodic payment. This spreads the payment of sales taxes out over time, making equipment even more affordable.
Leasing Assists With Planned Asset Management
Many companies do not have the resources to establish an official asset management program. Upgrades are usually made on a reactionary basis when equipment causes problems or lost productivity.
By matching the term of the lease as closely as possible to the anticipated useful life of the equipment, it automatically establishes a point in the future when a decision will need to be made whether to upgrade or keep the asset. The end-of-term options under a Westport lease give the lessee the flexibility to decide the best strategy for their equipment, but at the same time gives a timely reason to carefully consider what is in their best interests long-term.
Westport also assists by keeping detailed records of equipment on lease, date of delivery, serial numbers, original suppliers, warranty information, etc. This can relieve an added administrative burden.
Leasing Matches Cash Flows And Benefits Resulting From New Equipment
Large purchases tend to cause disruptions to regular budgeting and cash flows. Extra time planning and managing working capital may be necessary to accommodate an equipment purchase.
Leasing allows equipment to pay for itself from the financial benefits generated. This balances both the short-term and long-term cash flows. It makes it easier to manage the impact on operating capital, and helps to demonstrate that the decision to add or upgrade to new equipment is justified.
Leasing Provides Assistance With Equipment Selection & Purchases
Purchasing new equipment is often a major decision and can sometimes be a complicated process. You have to decide which equipment will best meet your needs, locate and select a reliable supplier, and also make sure that you don't pay too high a price for the product.
Westport's clients find that we provide valuable assistance and support when getting new equipment. It is in our interest to see that clients get quality equipment that will meet their long-term needs, and we want to make sure that the equipment put on lease is not priced above its market value. We have dealt with, and can recommend reputable dealers for equipment of virtually every description. Our accumulated experience and resources can help make every purchase easier.
Leasing Empowers Staff
If your company requires endless meetings and discussions to approve large-scale purchases, leasing can simplify and streamline the process. When lease payments are framed within the context of operating expenses, the decision to lease can be handled by managers and supervisors who possess the front-line experience to make the right call, yet may not have the authority to approve capital expenditures.
Leasing Equipment Builds Equity
Companies who avoid purchasing needed equipment by regularly renting on a short-term basis, may be paying more than necessary and reducing long-term profitability.
A Westport lease can provide a lower rental cost for needed equipment. The other advantage is it provides the lessee with 100% of the equipment's trade-in value to apply against a new lease or upgrade. This makes it economical to upgrade equipment frequently and still pay a lower cost than short-term rentals.
Equipment used for business or commercial purposes rarely appreciates in value, and businesses will only profit from the use of the equipment, not through ownership. Leasing often provides the same access and use of equipment as a purchase, but at a lower after-tax present value cost, and with many other associated benefits. Carefully consider the advantages leasing can offer when looking to upgrade or add new equipment to your business. If you have any questions about the benefits or advantages to be gained by leasing, please Contact Us.
Westport Leasing Corporation
11198 - 84th Avenue Box 33026
Delta, B.C. CANADA V4C 2L7
Phone: (604) 681-1260 | Toll Free: 1 (800) 667-0747
Fax: (604) 681-1680 | Toll Free Fax: 1 (800) 667-4426