It was once thought that leasing was reserved for large ticket items such as aircraft and locomotives or as a last resort when businesses could not obtain more conventional financing through their bank. However, in 2004, of the $690 billion that U.S. companies spent on capital equipment, $229 billion (33 percent) was leased, marking a significant trend away from cash or conventional loan equipment purchases.
Leasing is more often utilized for its flexibility and ability to reduce costs, cash outlays and taxes. Many worldwide companies now use leasing to their advantage, even if they have the cash available for outright purchase of equipment. Efficient accountants have leveraged tax laws to shelter expenses for their customers. Leasing is often cheaper than conventional loans and has lower exposure than the collateral required by banks. And, with a rising number of leasing companies operating today, the competition for your business keeps borrowing costs low and value-added service high.
There are a few tax laws on the books today that allow leasing customers to take advantage of deductions to deflate the bottom-line reported to the IRS. For example, IRS provisions under the American Jobs Creation Act of 2004 allow you to take a one-time deduction of up to $105,000 for equipment purchased and placed in service within the calendar year. These rulings apply to leases set up as a financing agreement. Upon meeting some specific requirements for designating your transaction as an operating lease, you can even expense every payment you make. Each type of business is guided by different tax laws so; I encourage you to talk to your accountant on how the rulings can help you save money at tax time.
Many companies realize that there are unforeseen costs incurred when purchasing new equipment for cash. If you write a check for new equipment, then there is an immediate loss of that capital for other opportunities or unexpected emergencies. When capital is overextended, clubs must borrow at costly rates. Conversely, if a club leases its fitness equipment and pays for it as the equipment generates income, the cash outlay and borrowing costs are minimized. Here is an example:
1. Say you need to purchase $100,000 in new equipment for your club. If you decide to pay cash for it, the equipment will fully depreciate over the next seven years, dropping $14,285.71 per year from the value of your investment.
2. If, instead, you decide to lease the equipment for a five-year term, then your monthly payments would be about $2,070 – while the equipment earns income for your business – for a total outlay of $124,200. Meanwhile, you could invest the $100,000 in a Certificate of Deposit (CD) with an Annual Percentage Yield (APY) of four percent, and you would earn around $21,665 over the same fiveyear term. The difference between your lease-payment outlay of $124,200 and your principle with earned interest of $121,665 would be a net cost of only $2,530 to lease the equipment.
3. Either way, after depreciation, your investment would be worth about $28,570 at the end of five years. But by letting your equipment pay for itself over the term of your lease without extending $100,000 of your working capital at the onset, you are able to retain that cash for investment income, emergencies or more advanced revenue-generating equipment.
Leasing as a cost-saving financial tool has become very popular. More and more major banks are now operating leasing divisions or subsidiaries. As a result, lease interest rates are more comparable to the traditionally lower rates of conventional loans. Since leases are usually established with a fixed, rather than adjustable rate, the lease rate can even be lower than that of a secured line of credit.
You’ll find that several fitness equipment manufacturers have special programs with leasing companies or even own and operate their own “captive” leasing companies, exclusively financing their products. While rates for those leases may be competitive, they may not allow you to bundle other manufacturer’s equipment on the same lease. Third party leasing companies offer a competitive solution that, in most cases, combine all the equipment you need into one monthly payment, and because the competition is fierce, the rates are typically lower.
Next time you are considering an equipment purchase, before exhausting your capital or borrowing from your bank, consider the low-cost alternative of leasing. You’ll find more competitive rates, more flexibility and higher service. Because leasing is becoming more specialized, leasing representatives often know your industry and they can help you to make decisions that will grow your business.
Rob Hardcastle is the Business Development Officer for Popular Leasing. He can be contacted at 800.829.9411, or by email at rhardcastle@popularleasingusa.com.
