Opinion: Using Equipment Leasing to Strategic Advantage
B>By Michael J. Fleming
I>President
quipment Leasing Association
Executives facing lease vs. loan decisions may not fully know how the strategic use of equipment leasing can enhance financial performance and capital productivity. A deeper understanding of the lesser-known points of leasing — including asset management, tax treatment, insurance, maintenance and lease options — can better enable overall business performance.
Companies that acquire significant amounts of equipment can learn valuable lessons from the leasing industry by reviewing their strategies and programs for efficient asset management. They can be easily adopted by most businesses, especially midsize to larger companies.
“Asset management” basically means the ability to plan, acquire, manage and recycle assets in a systematic manner. Each stage of management has a significant impact on portfolio return and profitability. Asset management should be employed throughout an asset’s life cycle, from the delivery of equipment to its use, maintenance and disposition.
Most companies do not employ a formal asset-management program. However, lessors have noted a growing trend among managers to seek methods that will reduce their need for additional capital as well as improving productivity from the current mix of assets.
Over the next five years, asset management programs are expected to become standard in medium- to large-size organizations, and leasing companies are being called upon to provide management expertise to companies seeking internal help with their programs.
A careful consideration of financial goals, such as improving cash flow or meeting a return on net assets, is the foremost component of an asset-management program. Establishing acquisition guidelines based on equipment needs and financial objectives also is crucial.
These goals — different for each organization — should also be factored into the criteria for measuring the performance of a division or business unit.
Businesses would be wise to track maintenance and insurance costs associated with equipment, particularly equipment under heavy use. Is it cost effective to keep a piece of equipment for an additional year, or incur additional maintenance costs, which could mean keeping it an unsound financial investment?
Also, determine how much growth is expected over the next one to three years. This has an effect on the acquisition mix of ownership, renting and leasing. Most businesses grow and change at varying rates. If an organization goes through a sudden growth spurt, having the flexibility to change your asset mix is of greatest importance. The ability to dispose of equipment no longer needed during slower times also is important.
As your company’s needs fluctuate, you must decide how much and what kind of equipment is needed. Equipment use and estimated obsolescence should be reviewed in order to help establish a meaningful guideline for future acquisitions. Determine exactly how the equipment is being used and when it will no longer be useful. Financing the asset for that set amount of time may be the wisest investment, with a disposal plan in place for when the asset is no longer improving productivity.
The type of lease contracted for has implications for equipment renewal terms and future acquisitions. Unless you have contracted under a master lease, you most likely will need to negotiate a new lease contract for additional equipment acquisitions.
If you anticipate business growth that will require additional equipment, you can avoid a new leasing contract by negotiating an option to add equipment under original terms and conditions when structuring a lease program. This helps stabilize capital outlay.
Determination can be made at the outset whether the leasing company will handle maintenance and insurance. Though considered value-added services, all are increasingly becoming standards in lease agreements, and are more efficiently handled by a leasing company with core competencies in these areas.
The business’s accountant should be consulted about getting the best mix of leased/owned assets on the corporate balance sheet. For instance, under accounting rules, an operating lease is a tax-deductible overhead expense, and lease payments are deducted from corporate income. Also, leased equipment does not have to be depreciated over years.
Managing obsolescence is a key strategic benefit of equipment leasing. While some industries are more sensitive to equipment obsolescence than others, most businesses use information technology equipment and are subject to the required updating for the latest technological advances.
Determine how long the equipment being acquired will be considered useful and productive to the organization.
Leasing allows the upgrading of equipment without having to manage disposal and other ownership burdens. The risk of getting caught with obsolete equipment is lower with leasing than with other equipment acquisition methods.
For further information on how leasing may be used strategically, visit the Equipment Leasing Association’s Web site — at www.ChooseLeasing.org. You will find a lease vs. buy analysis, a glossary of leasing terms, an analysis of the benefits of leasing, a directory of leasing companies and more.
Based in Arlington, Va., ELA is a trade association representing the $208 billion-a-year equipment leasing industry.
This story appeared in the July 19 print edition of Transport Topics. Subscribe today.
