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Buy what appreciates, lease what depreciates What you need to know about leasing By Bob Pettinicchi When you think of leasing office equipment, you probably think of a long-term contract that offers little, if any, advantage over ownership. But ask yourself: What are the real advantages of “ownership” when technology and equipment changes are inevitable? Chances are you’ll want to upgrade your computers, software and other office equipment every two years to maintain a technological edge. To remain competitive and relevant, it’s important to understand the advantages of leasing and how it can help grow your business. The truth is that leasing makes perfect sense for independent insurance agencies, and it can be one of the smartest business decisions you’ll ever make. The independent agency distribution channel will be presented with many opportunities for those agents who understand the right time and place to make investments. But why would an agency principal “invest” in a piece of equipment that will be worth a fraction of its cost in a very short time when he or she can make timely investments in the acquisition of books of business, the development of producers, or branch expansions? As we all know, these latter types of investments can pay great dividends in enhanced agency values. The bottom line is: If it depreciates, lease it. For example, the following types of equipment are typically leased: copy machines, printers, computers and related software, fax machines, telephone systems, office furniture, company vehicles, and so on. Why spend years paying large monthly bills to end up owning antiquated equipment or technology? In our industry, leasing equipment successfully requires the right partner who understands the business needs of independent agencies and owners. The master lease agreement Leasing offers more flexibility than you may think. For example, you can bundle all of your leases together into a single lease. Referred to as a “master lease agreement,” the concept is very simple. It allows you to set up a single lease agreement and then add equipment to the original agreement as you require. Instead of taking a “pay-as-you-go” approach with multiple lease agreements and a myriad of payment dates, a master lease agreement allows you to stretch your payments and reduce the impact on your annual budget. A single approval process allows you to use the money as you wish. You no longer have to go through the lease approval process multiple times as you lease new equipment. As previously mentioned, an advantage of a master lease agreement is that it allows you to add equipment as needed throughout the term of your lease. Consider the following scenario: If your agency grows, you may need to purchase more equipment or lease more office space. Instead of leasing your phones from the phone company, your copy machines from the office supply company, your furniture separately and so forth, with a master lease agreement you can add these onto the existing lease. With a master lease agreement, you fill out the necessary paperwork only once, you’re approved for one sum, and throughout the year you can prioritize your needs and lease when the time is right. Advantages of leasing Leasing offers flexible options and terms depending on your needs. The three most common lease types are fair market value (FMV), fixed price purchase option (FPPO or finance lease) and the $1 purchase option ($1 out or finance lease). Under a fair market value lease, the lessor retains ownership of the equipment and the lessee pays rent for the use of the equipment. This lease type offers the lowest monthly payment. Additionally, customers can opt to trade up or add equipment during the term of the lease. The fixed price purchase option provides the benefit of ownership to the lessee, and monthly payments are slightly higher. With this type of lease, the lessee takes depreciation and interest expense and can add on equipment during the term of the lease. Finally, the $1 purchase option comes with higher monthly payments but also provides the benefit of ownership to the lessee. As the name indicates, it allows the lessee to purchase the equipment for $1 at the end of the lease term. Not only does leasing offer flexibility, it also offers financial advantages that help you save money. Leasing can also offer you tax advantages, but they may not apply to everyone, so make sure to consult with your accountant on how it can benefit you. Leasing allows you to conserve bank credit and keep cash that you can put back into your business for both operational and short-term financing needs. With lower monthly payments, your cash is not tied up in equipment; instead, the money can be available for opportunities such as growing your business. Leasing contracts may also give you the flexibility to tailor payments around your peak and low cash flow periods. Choose the right partner If you are in the process of selecting a leasing partner, remember that you have a choice and make sure you consult with a trusted financial partner who understands your business. Independent agencies and their owners have unique financial needs, and choosing the right leasing partner can help save you money in the long run. There are three general types of leasing companies: • Captive lessors are companies that primarily (51%-plus) lease a related company’s equipment. For example, most copier sales companies have a related lease entity that will lease their equipment. • Bank lessors are companies whose operations and/or funding are tied directly to a bank. • Independent financial services companies are typically equipment generalists that offer a broad array of solutions. The right partner will likely be the institution that understands your business best and is not interested only in making an equipment sale. When evaluating lessors, ask tough questions. Will the leasing company allow you to tailor payments to meet specific cash flow needs? Will it allow you to structure your payments to parallel cash flow? Is there a master lease agreement program? If you’re considering leasing through your bank, does the bank really understand the needs and financial intricacies of your business? Leasing is an option that can help you make the most of your business and cash flow. It’s less expensive than ownership, offers more financial incentives and, most important of all, offers you financial flexibility to help you stay current, competitive and flexible to capitalize on upcoming opportunities in your industry. * The author |
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