Buying Alternatives: Understanding leasing and financing

Equipment financing is always a consideration as businesses continually need to replace assets and expand and grow. Today, however, it comes with new challenges as the economy and inflation drive up costs for both new and used machines.

The equipment leasing and finance industry has always been very customer focused, noted Ralph Petta, president and CEO of the Equipment Leasing & Finance Association (ELFA). “Companies in the equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods, work with customers in different verticals to structure financing and payment schedules. They are very flexible when it comes to working within a borrower’s payment capabilities and can address seasonal use and cash flow factors with variable payment options.”

With businesses ranging from small local operations to major corporations financing their equipment it’s important to fully understand the benefits, Petta added. “Financing is always a viable option for acquiring equipment but you should know the ins and outs so you can negotiate what's best for your company,” he said.

To help equipment users effectively finance purchases and choose the appropriate option and terms that are right for their businesses, ELFA has compiled a list of issues to consider:

●       Financing with no down payment. Unlike requirements of most traditional lenders, you may be able to arrange 100 percent financing, a key possibility to consider if cash flow is a concern to your business.

●       Maintain cash. Equipment financing is a source of funding that lets you hold onto working capital so it can be used for other areas of your business.

●       Manage risk. Equipment financing can help mitigate the uncertainty of investing in a capital asset your business needs until it achieves a desired return.

●       Hedge against inflation. Instead of paying the total cost of equipment up front or making a large down payment, the stream of payments delays your outlay of funds. In addition, either a lease or loan can lock in rates so the finance company absorbs the devaluation of your payments over time due to inflation and other financial risks.

●       Plan expenses for cash flow and business cycle fluctuations. Financing equipment helps maintain cash flow and provides for greater certainty in budgeting by setting customized payments.

●       Keep up to date with new technology. Financing enables you to acquire more advanced equipment. Certain programs can also allow for technology upgrades and/or replacements during the term of the contract.

●       Address tax considerations. Tax-oriented leases should produce lower payments since the lessor retains title and depreciation. Conversely, a conditional sale or loan enhances the tax benefits of higher deductions for the borrower.

●       Leverage equipment expertise. The equipment financier can be a valued consultant, providing benefits that range from setting residual rates through lifecycle asset management solutions.

●       Obtain the convenience of product and service bundling. Certain financial products allow customers to finance the entire cost of equipment, including installation, up-front maintenance, training and software, in a single, easy-to-manage solution.

If you’re looking for financing, the good news is that you have a variety of options. Three main sources of funding, according to ELFA, include:

●       Bank Affiliated - Financial services companies, including commercial banks, investment banks and multi-line finance companies that finance equipment utilizing internal funding sources.

●       Independent – A funding source that finances directly to businesses by using a company portfolio and providing a broad range of financial products.

●       Captive - The arm of a manufacturer or equipment supplier that typically provides financing for their parent company's products or dealer networks.

“The more questions you ask, the more information you will have in order to make an informed decision about financing,” Petta said. “Knowing the right questions to ask will put you in the strongest position possible as you acquire equipment so you are able to focus on making strategic use of your assets, especially at a time when businesses need every advantage to stay afloat and be competitive.”

Seth Skydel is a writer with 38 years of experience covering the trucking, utility, construction and related markets.