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August 3, 2010

Interest rate differences on leases versus mortgages

Filed under: Leasing tips — Tags: , , , , , , , , , , — afp @ 10:08 am

interestrate

Customers who are new to leasing are often surprised at the interest rates on leases.  Many people think interest rates for leases are going to be similar to home mortgages.  I wanted to take some time to explain the difference in the two and explain how a lease rate is calculated and why it will be higher than your home mortgage rate. 

First, let me explain how a lease rate is calculated.  There are several components that go into setting a lease rate factor and most of today’s increases in rates are tied to the entire lending and economic condition of our country.   

  • Cost of Funds- This is the interest rate the leasing company borrows its money at.  Leasing companies and banks can get their rates from a number of places, but many will tie their rates to LIBOR or SWAP rates.  If the bank the leasing company is borrowing funds from is in trouble, it may have a higher borrowing rate which then is passed along to the leasing customer.
  • Deal Size- The dollar size of the lease will affect the lease factor rate.  The higher the dollar amount of the lease, the lower the borrowing rate is.
  • Credit Strength- How financially strong is your company?  What is your personal credit score?  How long have you been in business?  What is your paydex score on your D&B business report?  Have you paid other leases on time?  All of your business and personal credit attributes will be considered when a leasing company gives you their approval terms and rates.
  • Lease Term- Most leases range from 24-60 months.  Leasing companies will charge a higher rate the longer the term.   If you would examine portfolio performance for a leasing company you would see that the shorter terms have better performance.  Because of this a leasing company will charge a higher rate on longer terms simply because they are riskier leases to write.  Leases under 24 months will have a higher interest rate as well.  The leasing company has less time to earn interest and make their margin so they have to increase the interest rate to make sure they make enough in that 12-18 month period to meet the margins they need to hit.
  • Equipment- Many banks will restrict certain types of equipment or offer a shorter lease term because they either don’t understand the equipment/market, they’ve had bad performance on that asset type in the past, or because there is a flood of repossessed and off-lease equipment already in the market due to business failures (this makes it more difficult for them to resell that unit if they get it back at the end of the lease or if they repossess it themselves).  Some banks will charge more for what they consider high-risk assets.
  • Residual- Some leasing companies will take residual risk on specific types of equipment; meaning at the end of the term, they will have a 10% or 20% balloon payment versus a $1.00 buy out.  The higher the residual the leasing company is willing to allow, the lower the lease rate and payment will be.
  • Depreciation- Will the leasing company depreciate the equipment?  If not, you will pay a higher lease rate than with a lessor who can utilize the depreciation.

The biggest reason for increased leasing rates in the current market is because leasing companies and banks are much more conservative than they were in the “hay days” of leasing.  Two years ago a company could qualify for the best rates with a 650 credit score and 2 years time in business.  In today’s market if you are not a 700 credit score minimum (usually 725 or higher) and have over 5 years time in business, you will not qualify for the best rates out there.  Many companies and individuals have struggled with these changes.  What they used to qualify for, they no longer do, even if they are paying their previous leases on time.  I do not see things changing in the near future, so if you are a business owner make sure you keep your credit healthy.  For tips on increasing your credit score, read our Blog from January 7, 2010 titled “A Good Credit Score Isn’t What It Used To Be.”  http://financewithafp.com/blog/?p=167.  We have several other blogs about personal and business credit, so take some time to scan through all of them. 

Leasing rates will always be higher than home loans for a number of reasons, first is the asset.  A home will usually appreciate so it is considered a quality asset.  Most equipment written on leases will depreciate and many equipment types have no outside marketable value once the lease is funded.  This makes a lease higher risk and thus requires a higher rate of interest.  Secondly, a home mortgage is a higher dollar amount than most leases funded by small business owners.  Based on deal size alone, a home mortgage will have a lower rate of interest.  Last, a home mortgage will usually ask for more money down so there is more security.  An equipment lease typically asks for only 2 payments in advance making it a higher risk.  There are other factors that play into this, but these three are the main ones I wanted to touch on.

Although leasing rates are higher than home mortgage rates, leasing provides several benefits to a business such as allowing a business to conserve their working capital, preserve their credit lines, take advantage of off-balance sheet financing and receive tax advantages.  80% of all businesses in the United States lease equipment and 30% of all assets acquired are written on a lease. 

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July 6, 2010

Benefits of Leasing… Leasing 101

Filed under: Leasing tips — Tags: , , , , , , — afp @ 8:52 am

cash flow

I am asked on a consistent basis by customers what the benefits of leasing are and how leasing differs from a loan with their bank.  There are many differences and it is important to understand them before deciding what payment/finance option is the best for your company when looking to acquire equipment.  Here are some of the main benefits to equipment leasing:

Conservation of Working Capital:

With an equipment lease, you get 100% financing so the amount of cash needed up-front is reduced. Even if you have the cash to purchase your equipment it may not always be the best choice. With equipment leasing, cash can be used for other business uses such as expanding sales, new marketing programs, quantity discounts, increasing inventories, opening a new line of business, or simply cash reserves.

If you decide not to lease, you will have to come up with the entire amount for a cash purchase OR a sizeable down payment as well as higher payments for traditional financing.

Preservation of Credit Lines:

A lease preserves bank lines of credit for working capital, seasonal requirements, other appreciating investment opportunities, or emergencies. Equipment leasing is like opening an additional line of credit.

Better Terms and Structure than Banks:

Most bank loans require larger down payments, compensating balances, additional collateral, or restrictive covenants. They may not be as flexible in their payment schedules and may tie the financing to a floating interest rate. Equipment leasing has fixed payments, flexible schedules, low down payment, and does not require extra collateral.

Off-Balance Sheet Financing:

Larger companies often have a need to maintain certain debt-to-equity ratios or comply with debt covenants. Operating leases do not show on the balance sheet as liabilities and the equipment is not counted as an asset, thereby keeping the ratios unaffected.

Tax Advantages:

Operating leases are generally treated as fully deductible direct operating expenses, which means a lower taxable income. In addition, equipment leasing can be a tool to avoid certain negative impact of the Alternative Minimum Tax. Your tax professional should be consulted to determine what percentage of other types of leases could be deducted.

Leasing Provides Sales/Use Tax Deferral:

With a purchase, sales tax must be paid in full at the time of purchase. With (most types of) equipment leasing sales/use tax is paid over time as the equipment is used (except in Illinois, Maine, New Jersey, and the District of Columbia). This can result in substantial cash savings in the first year of the lease.

Hedge Against Inflation:

With the lower, fixed-rate payments of an equipment lease, you’re protected against inflation. With equipment leasing, cash outlays are deferred as compared to an upfront purchase. Inflation will then lessen the cost of future lease payments, since the payments will be made with “cheaper” dollars. You will be making your monthly payments to the leasing company with ever-inflating dollars during the term of the lease. This actually reduces the cost of financing to you in real dollars, which is an advantage that is often overlooked.

Maintains Owner’s Equity:

Many companies in a growth phase sell stock to raise money for expansion. A well-conceived lease program can allow a company to grow while minimizing the need for equity financing.

Facilitates budgeting:

Equipment leasing simplifies accounting procedures and eliminates depreciation scheduling. A fixed lease cost ensures consistent control over equipment expenditure.

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March 15, 2010

Use Leasing Instead of Credit Cards To Finance Your Business

Filed under: General — Tags: , , , , , — afp @ 8:40 am

credit card

There have been many articles written in the past several months about business owners using their credit cards to finance their businesses due to the tight lending guidelines they are experiencing.  Many entrepreneurs are financing their new ventures using credit cards when credit is hard to come by.  According to a survey by the National Small Business Association in April of last year, 59% of those responding said they had used credit-card financing for their businesses in the past 12 months, up from 49% who said they had done so in a December 2008 poll.  But basing a small business on credit card debt is shakier than in the past because card limits and rates can be so volatile.  It is easy for a business owner to use credit cards to help cash flow.  Then one month, you get overextended and miss a payment and the credit card company jacks up the rate or cuts the limit that you were counting on to meet expenses next month… and things start to spiral down quickly. 

Another article reported that a growing number of struggling consumers are paying their credit card bills instead of their mortgages.  A recent study developed by TransUnion found the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6% in the 3rd quarter of 2009, up from 4.3% in the first quarter of 2008.  Meanwhile, the share of consumers making mortgage payments on time but behind on their credit cards moved in the opposite direction, sliding from 4.1% to 3.6% over the same time period.  This is a huge shift from how consumers acted prior to the recession.  It was previously assumed a homeowner would do whatever possible to remain current on their mortgage, even if that meant falling behind on other bills.  Due to the current economic mess, falling home prices, high unemployment and tight consumer credit, many consumers have had to prioritize credit card payments above mortgage bills.  Because of the housing bust, roughly one in four homeowners finds himself in a negative equity position on their homes.  They don’t see any value in putting money into an asset that has lost that much value and will probably never regain that value to offset the mortgage.  Credit cards on the other side can be used to pay for basic necessities, like food, gas or clothes and that availability goes away much quicker if you do not pay your bill on time.  If you pay your credit card late for a couple of months, they will close it on you.  If you default on your mortgage, you have six months to two years down the road before they actually foreclose on it.  Not to mention that it is just plain hard to operate in our society without a credit card today.

I read all of these statistics and it makes my head hurt.  And then I wonder… why isn’t anyone turning to leasing for their business start-up or equipment financing needs?  Equipment leasing doesn’t have as strict of guidelines as bank financing does.  We have helped many new businesses finance their equipment in 2009 and so far in 2010.  We have helped many businesses who were declined at their local banks get the financing they need on their equipment.  The rate will be higher than your local bank loans will be, but leasing doesn’t require a blanket lien on all of your business and personal assets.  Leasing does not ask for 20% down.  Leasing has a fixed interest rate so the business owner doesn’t have to worry about the credit card company driving their rate way up.  Leasing doesn’t report against your personal credit bureau like credit card debt does.  The #1 reason why my customers get declined for financing is because of high and maxed credit card debt which drives down credit scores.  Leasing also gives tax advantages to the business owner.  Using leasing to finance business equipment needs allows business owners to keep their credit cards open for any real emergencies that come up in their business.   

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March 4, 2010

Use Leasing To Keep Your Technology Up To Date

Filed under: Leasing tips — Tags: , , , , , , , — afp @ 9:41 am

computers

The rate of technology obsolescence has increased in the past decade causing computer hardware and software to become outdated in months instead of years. Networked office equipment and peripherals can create an archaic feel to even the most innovative business. If your business is feeling the effects of outdated technology, turn to leasing to refresh your technology every 2-3 years.

Leasing provides a technology rotation lease that allows your business to acquire the technology you need and gives you the opportunity to refresh your desktop technology every 2-3 years. The most common types of equipment to be financed through the technology rotation lease are servers, desktop computers and laptop computers. A true residual position is taken on the computer equipment and all or part of the equipment can be returned at the end of the lease term. For example if you lease 25 computers, you could return all 25 at the end of the term or only return 15 units and purchase the remaining 10 to keep in the business. The higher residual value gives you the best rate available so that you can benefit from the equipment during its most useful life. This also allows your business to stay in a progressive position in the market you are in.

Leasing the computer equipment not only allows you to reduce your technology obsolescence but also gives you heightened tax benefits and allows you to conserve your existing cash reserves and bank lines. A Fair Market Value lease provides your business with off balance sheet financing. Computer equipment purchased with cash or on loan will depreciate over a 5 year schedule. With a Fair Market Value lease, a business can write off their entire purchase over the 2-3 year lease term.

Some examples of who would benefit from technology rotation include:

• Technology replacement according to industry life cycle is needed
• There is a business need for rapid technological change
• There is a business need for quick adoption of new technologies
• Higher end software users with frequent software upgrades

If you need to be at the top of your game in technology to effectively compete in your market or to just plain and simple run your business, consider leasing for all of your hardware needs.

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January 22, 2010

Turn to Leasing when Banks Are Not Lending

Filed under: Leasing tips — Tags: , , , , — afp @ 10:38 am

money

An article in Business Week yesterday talked about the difficulties small business owners are having finding banks to lend to them because of reduced home values and other personal assets.  Many small business owners in the past have financed their businesses by securing money through home equity loans.  As home values decrease, these business owners are finding that money is no longer available.  Banks are still ultra-conservative in their lending practices and many small and medium sized businesses are finding it hard to get the money they need to grow their business.  Leasing is a great option for these small to medium sized businesses. 

Lease financing is generally more expensive than bank financing, but it is more easily obtained.  Leasing only takes the equipment as collateral and doesn’t require the business owner to tie up their business or personal assets.  Some of the other benefits to leasing include:

  • Most leasing under $75,000 only requires a one page application and bank statements. 
  • A business owner can roll in the soft costs associated with the equpiment purchases such as installation, freight and training services.
  • Fast turnaround time.  Most leases can be processed in a manner of days.
  • Leasing is an option even for start-up businesses and businesses/people who have had some past credit issues.
  • Used equipment of all ages can be leased.
  • Leasing provides flexibility with term (1-5 years typically) and end of lease options (you can return the equipment at the end or own the equipment at the end).
  • Leasing provides a fixed interest rate. 
  • Leasing provides tax benefits and operating lease payments can be 100% tax deductible when shown as an operating expense (Off-balance sheet financing).

Leasing is a great option for business owners to obtain the equipment they need to grow their business without all of the hassle.  Even if your bank will not lend to you right now, give leasing a shot.  For more on the state of small business bank lending, see:  http://www.businessweek.com/smallbiz/running_small_business/archives/2010/01/lower_home_stoc.html

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November 12, 2009

Turn to Leasing as Lending Guidelines Tighten

Filed under: Leasing tips — Tags: , — afp @ 5:48 pm

I read an article this morning from www.creditcollectionsworld.com that I wanted to share:

U.S. banks continued to tighten standards and terms over the past three months on all major types of loans to individuals or households during the third quarter, according to a senior loan officer opinion survey on bank lending practices released by the Federal Reserve. The percentage of banks that tightened standards and terms for most loan categories, however, continued to decline from the peaks reached late last year.

Some 15% of survey respondents reported tightening standards for credit card loans to individuals or households, down from the 35% that reported doing so in the previous quarter’s survey and the smallest net percentage reported since April 2008. Between 30% and 40% of banks continued to report tightening various terms and conditions on credit card loans, including credit limits, interest rate spreads, minimum required credit scores and their willingness to grant loans to customers who do not meet credit-scoring thresholds.

Approximately 15% of banks, on net, reported having tightened standards on consumer loans other than credit card loans during the third quarter, down from the 35% that reported having done so in the previous quarter and the smallest net percentage of tightening recorded since January 2008. With the exception of interest rate spreads, which nearly 35% of banks reported having widened, reports of tighter terms on other consumer loans were also less prevalent. For consumer loans of all types, 25% of banks reported weaker demand, roughly the same as in the previous quarter.

Approximately 25 % of banks, on net, reported that they had tightened standards on prime residential real estate loans over the past three months, which is slightly higher than during the second quarter, but is still significantly below the peak of 75% that was reported in July of last year.

For the third consecutive quarter, banks reported that demand for prime residential real estate loans strengthened. Some 30% of banks reported tightening standards on nontraditional mortgage loans, which represents a decline of about 15 percentage points from the previous quarter.

This article focuses on consumer lending, but commercial lending guidelines are following the same trends.  Leasing is an even more important option to business owners today who need to acquire equipment for their businesses.  Leasing has seen tightened guidelines as well, but is still offering lease approvals to many business owners who have been turned away by their local banks.  Leasing has many benefits to it including lower down payments, only the equipment as collateral, no blanket liens on your business, and faster turnaround time just to name a few.   Leasing has become even more popular in the past few months as banks continue to tighten their standards.  Leasing equipment is a quick and simple process that, if done correctly, can have an extremely positive impact on your business. It’s a great way to grow your business without significantly impacting your cash flow.

September 29, 2009

Benefits of leasing

Filed under: Leasing tips — Tags: , , , , , , — afp @ 9:15 am

Today, more than 80% of all U.S. corporations lease some or all of their equipment.   Even consumers are catching on, leasing more automobiles than ever before.  Whatever your business, whatever your strategies and objectives, leasing just makes more sense than buying.  Leasing gives you financial flexibility, helps you meet changing technology needs quickly and easily, and offers tax advantages, too. Equipment leasing is a powerful tool that saves you time and money and helps you gain the competitive edge.  Some of the main benefits to equipment leasing include:

  • Conserve cash for when you need it most
  • Convenience- fill out a simple one-page application
  • Quick turnaround time- you will typically have an answer in 24-48 hours
  • 100% financing available- include installation, shipping and other soft costs a bank will not finance
  • Tax advantages- under IRS Section 179 you can write off up to $250,000 in equipment purchases in 2009
  • Off balance sheet financing- under an operating lease, you do not show the leased asset as an asset and liability on your balance sheet and can simply write off your monthly payments lowering your taxable income
  • Fixed payment- your payment never changes throughout the lease
  • Converse bank lines- Your existing lines of credit and borrowing availability are left untouched and ready to use for operational and short-term financing needs
  • Used equipment- many banks will not finance used equipment, leasing is a great option for acquiring used equipment
  • Flexible payment options- if you have a seasonal business, leasing can set payment terms that match your business trends
  • No blanket lien- leasing only takes the leased equipment as collateral and does not file a blanket lien on your business or personal assets like a bank will
  • Less money down- a lease generally asks for 1-2 payments down versus a bank who will request 10-20% down

Leasing provides many benefits to business owners and is already widely used across the World.  Contact AFP to learn more about equipment leasing and how to get started!

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