To lease or not to lease

Entrepreneur,  Feb, 1998  by Jill Amadio

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One of the greatest obstacles for entrepreneurs ready to expand their businesses is finding the cash to upgrade and buy additional office equipment. Sinking most of your hard-earned capital into needed computers, copiers, fax machines, phone systems and furniture can drop you into a bottomless money pit. Securing a bank loan is an alternative, but while you can use the bank's money for your purchases, you may be required to come up with the standard 20 percent down payment. In addition, bank loans usually offer little flexibility in the length of the loan, and they may not be totally tax deductible.

Before begging your reluctant banker for a loan, consider an option that keeps many small businesses afloat: leasing. According to the U.S. Department of Commerce, 80 percent of all U.S. companies lease all or some of their equipment. Most established businesses prefer leasing to avoid technical obsolescence without overspending. According to the Equipment Leasing Association of America (ELA), 77 percent of all leased high-tech equipment in the computer industry is either replaced or upgraded within 24 months.

Greg Loeschke of Farm Credit Leasing in Minneapolis advises customers not to confuse loans with leases. "A loan requires a [company] to invest a down payment in the equipment, or a first-and-last payment, and to finance the remaining amount, whereas a lease requires no down payment and finances only the value of the equipment expected to be depleted during the lease term," he says. "Securing a loan usually requires the borrower to pledge other assets for collateral," while collateral is usually not needed to secure a lease."

* ANYTHING AND EVERYTHING

Think your equipment needs go beyond the scope of most leasing companies? Think again. Today, you can lease just about anything, from construction cranes and office security systems to computer software. Credential Leasing Corp. in Harrisburg, Pennsylvania, leases medical, printing and production equipment, as well as construction, communications and office equipment to businesses in all 50 states, equipment that would range in purchase price from $1,000 to $400,000.

As more and more business owners realize the vast options available, many are turning to leasing. John Pantalone, owner of J.P. Southern Industries in Barrington, New Jersey, started his commercial horse-racing photography business in 1972, but it was 10 years before he realized the advantages of leasing.

"If I'd known about leasing before I opened my business, I could have saved myself lots of financial headaches and needless worry," says Pantalone, 54. "When I opened my business, I spent agonizing weeks arguing with banks for loans because I had no company financial statements to show them. I had nowhere near the $4,000 worth of photo equipment I needed. I finally managed to find some used equipment I could afford, but it wasn't my first choice. After I discovered by trial and error that leasing was an option, I never looked back. After 15 years, I still lease-purchase photo processors and computers for myself and six employees. Technology advances so quickly, I need the latest equipment to remain competitive."

When one of Pantalone's photo-processing units was almost at the end of its lease, he opted for a buyout, which gave him ownership; then he turned around and sold it for $2,000. "I made $1,500 on the deal after buying out my lease for $500," says Pantalone.

Pantalone leases through Advanta Corp, a financing company that services nearly 6 million customers. "We're big, but small-ticket leases are [also] a very important part of our business," says Jacqueline Kohler of Advanta, which is based in Voorhees, New Jersey. "We work directly with businesses and through manufacturer/dealer financing programs."

That's good news for small businesses, which are getting into the leasing act more than ever before. The ELA reports small business is one of the biggest markets turning to leasing. "Companies that lease now tend to be smaller, growth-oriented, focused on productivity, and more technology-oriented," says Suzanne Jackson of the ELA. "These are the companies long on ideas, short on capital, and in need of flexibility as they grow and change. They lease for efficiency and convenience."

* A LOOK AT THE BENEFITS

Efficiency and convenience are two things small-business owners can't get enough of. But what else is luring them away from buying equipment? For businesses that need equipment and need it now, leases are a speedy alternative. While banks can take weeks to approve business loans, leases are often approved overnight, with far less paperwork and looser credit requirements.

"We process lease documents by fax, with fast turnaround," says Steve Brooks, president of Lease Consultants Corp. in Des Moines, Iowa, whose company purchases equipment from dealers and then leases it to customers. "We [offer] credit approval and authorizations with a minimum of red tape, and documentation that's easy to understand," saps Brooks.