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Equipment leasing is one of the most utilized forms of financing for corporations—both domestic and international. In fact, over $250 billion in equipment value is leased every year and leasing plays a major role in virtually every industry of operation. Initially, lease financing was of short duration to cover very short term needs. Today, whether it is Operating, Capital or Synthetic, leasing is a continuous and entrenched means of financing the equipment needs of companies worldwide. Leasing’s popularity stems from several key advantages that leasing provides over other forms of financing.
Lower Cost/Lower Rates
True leasing is often attractive because of its lower all in cost versus other forms of assets finance. Much of the value comes when the lessee's cannot utilize the tax benefits of equipment ownership due to a lack of taxable income, an accumulation of NOLs, or being subject to the alternative minimum tax. Therefore, an efficient way to make use of MACRS depreciation deductions is to pass the depreciation along to the lessor; resulting in lower financing rates for the lessee.
Financial Flexibility/ Preservation of Credit Capacity
Leasing does not necessarily encroach upon existing credit lines and thus adds a layer of potentially off-balance sheet financing (in the case of operating leases) that does not necessarily increase the leverage ratios traditionally found in covenants associated with public debt and bank financing. But leasing is not just about financial engineering as many companies, as a business matter, would rather invest in assets with the potential to appreciate and lease those that tend to depreciate.
Tax Advantages
As an operating lease is not a purchase, lessees are able to deduct the lease payments on their Income Statements thereby lowering taxable income. Also, lessors can pass along the tax benefits of ownership to the lessee through a lower financing rate.
Flexibility and Convenience
Tailor lease payments to match cash flow; equipment needs not contemplated at budgeting may be met through a true operating lease with rental payments classified as an operating expense; provides 100% financing since no down payment is required (assuming rent is paid in arrears); equipment delivery and installation can be financed as well. None of this is usually possible with a traditional loan where most lenders require the borrower to take an equity position in the equipment.
Financial Statements/Cash Flow
When a lease is done under an operating structure, the asset financed and the associated debt are not captured on the balance sheet. In addition, the asset is not depreciated which can be a major benefit for companies that are EBIT focused or who cannot utilize the depreciation expense i.e., when a significant level of NOLs exist. Cash is not tied up in equipment equity and down-payments are eliminated. Also, since only 90% or less of the cost of the equipment is being financed, lease payments are usually lower than debt amortization and interest payments associated with debt financing.
Speed
Leasing affords an ability to more swiftly in meeting your equipment needs due to minimal documentation and red tape. Agilis is able to approve transaction within days.
Utilization Match/Upgrade-ability
Lessees are able to lease equipment for the period of time they expect to productively use the equipment while maintaining the flexibility to upgrade or extend use either during the lease term or at lease end. In addition, leases can be structured to match the cash flow capabilities of the lessee.
Less Risk of Ownership and Obsolescence
If your business continually requires new or the latest technology, a short-term operating lease is an ideal way accomplish that requirement without expending your cash position. Concerns surrounding obsolescence or incompatibility are eliminated given the limited term of use as the ability to upgrade or to initiate a mid-term rewrite.
Total Financing Solution
Leased equipment is 100% financeable (including the down-payment). The lease amount financed can include the costs of maintenance, warranties, shipping, and other costs incurred which may not be financeable in non-lease structures. As a result, lessees have more money to invest in their core business.
Free up Cash by Moving Assets Off-Balance Sheet
Leasing allows a company to free up cash by selling existing owned assets and thereby taking them off of the balance sheet, then leasing those same assets. This option, commonly known as a sale or purchase leaseback, could increase liquidity and reduce balance sheet leverage. This option can allow a company to invest sale proceeds in its core business or implement cost savings measures via this additional liquidity.
Many Options at the Back-end
Once a lease term ends, a lessee can chose to return the equipment, re-lease it at lower rates, or buy the equipment at no more than its market value.
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