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The Equipment Lease: Getting Your Piece (of Equipment) in Peace
Keep reading for some pluses of this financing option, a cautionary tale culled from one sign shop owner’s firsthand experience, and tips for smart leasing.
By Barry Campbell
Editor’s Note: The following text is the complete, unabridged version of the feature appearing in the June 2007 issue of Sign Builder Illustrated.
Certainly the opportunity to keep your capital liquid and prevent your shop equipment from depreciating or getting too technologically dated sounds like an ideal situation. And depending on your expectations for the shop—and in coming years, the shop’s size, customer base, and many other factors—it is an ideal situation.
That said, doing your due diligence before entering any sort of lease agreement is absolutely essential.
When considering leasing any piece of equipment, it’s essential to determine if it is:
* The right piece of equipment for the shop (and the shop’s business model);
* Genuinely going to boost the business or provide entry to a new market;
* Going to continue meeting the shop’s needs throughout the lease period; and
* Something worth owning at lease’s end.
While these things are a good starting point, the Equipment Leasing Association (www.elaonline.org) recommends that businesses ask the following ten questions, which take into account the "before, during, and after" stages of a lease before signing one.
Before
1. How am I planning to use this equipment?
2. Does the leasing representative understand my business and how this transaction helps me to do business?
During
3. What is the total lease payment and are there any other costs that I could incur before the lease ends?
4. What happens if I want to change this lease or end the lease early?
5. How am I responsible if the equipment is damaged or destroyed?
6. What are my obligations for the equipment (such as insurance, taxes and maintenance) during the lease?
7. Can I upgrade the equipment or add equipment under this lease?
After
8. What are my options at the end of the lease?
9. What are the procedures I must follow if I choose to return the equipment?
10. Are there any extra costs at the end of the lease?
Keep Your Cash
With the previously listed advice in mind, it’s worth considering some of the pluses of leasing sign shop equipment. Nearly any type of costly equipment involved in the sign making process can be leased. From a simple copier to the most expensive digital printing equipment, if it costs more than $1,000, it’s a solid candidate to be leased.
Rather than taking on ownership of that $8,000printer and assuming the depreciation and maintenance liabilities over the entire life of the equipment, leasing allows you to assume that responsibility for just as long as you use it and own it. With the proper lease, you can benefit from cutting-edge equipment, while the leasing company handles all the maintenance costs, interest, taxes, and even insurance.
A lease allows you to transfer that risk of obsolescence to the lessor since there’s no obligation to own equipment at the end of the lease. If you’ve bought the equipment and used it for several years and found it to be outdated, you’ve then got to get rid of it, which can complicate or bog down the process of getting new equipment into the shop.
With a lease, under some agreements a shop can literally keep itself on the cutting edge without assuming the risk of obsolescence. Master leases allow for additional equipment to be acquired under original terms and automatic upgrades to new equipment and technology.
Perhaps one the best arguments for leasing comes in the form of working capital. Purchasing equipment has a greater, immediate impact on cash flow than leasing, either through an outright purchase or through loan payments that are historically higher than lease payments. Leasing typically has a smaller impact on cash flow due to lower payments. Plenty of tax and other financial advantages can accompany leased sign shop equipment as well.
A Cautionary Tale
Now that we’ve established that leasing can positively impact a sign shop in a multitude of ways, it’s worth considering a cautionary sign shop leasing tale. While this is an extreme scenario, it raises a number of issues that bear additional consideration before entering a leasing agreement.
Dwight Hegel has owned Superior Silk Screen, Inc. (www.superior-silk-screen.com), located in Bismarck, North Dakota, since 1979. Last summer, Hegel sought to purchase a printer/cutting plotter combination that would boost his shop’s presence in the sign, banner, and screen-printing markets, with a price tag in the $30,000-plus range.
His thinking was that with only 5 percent cash up front, leasing the equipment would allow him to minimize expenditures and conserve cash that could be put toward the cost of consumables for the equipment and some building modifications that would be necessary to accommodate the equipment. “I didn’t want stretch out the payments on the consumables, so my plan was to pay for all of those and only lease the machines,” Hegel said.
The traditional banking situation in which 15 to 25 percent down might have been required didn’t make sense to Hegel, which was a solid assumption. He eschewed a traditional business model in which new equipment shouldn’t be purchased unless it can be paid for in cash. In today’s business environment this doesn’t always compute. That capital is often better spent by hiring additional staff, or can even be more productive if it is invested.
While it’s not the company Hegel leased with, a large player in the market is GE Capital Solutions, which provides custom finance/leasing solutions for sign industry manufacturers who in turn offer the financing options to their customers. David O’Sullivan, program manager for Vendor Finance for GE Capital Solutions (www.gecapitalsolutions.com), says financial flexibility is one of the most prominent benefits of leasing. “Say you have a large dollar amount saved up for equipment,” he suggests. “How much more volume could you generate by hiring two new people with that money and leasing equipment instead of owning it? And you can tailor the lease so you can own the equipment at the end of the lease if you like.”
Financing is a tool designed to give the business owner more flexibility, O’Sullivan adds, and understanding the financing option is the key. And while understanding the options requires plenty of work on your part, the lessor should do his part by working hard to facilitate that understanding.
Hidden Numbers
Hegel, who had experienced no issues whatsoever when he leased equipment previously, never expected his leasing experience to sour so quickly. He selected his lessor based primarily on price since they’d offered the best deal out of several leasing companies who’d contacted him over a period of a week. (Like most business owners, he’s bombarded by lease offers on a regular basis.)
After signing an agreement with the leasing firm, Hegel overnighted documents, signatures, and a deposit check of roughly $750 for the deal. Within the week, his leasing agent sent him the final numbers, which were higher—by a few thousand dollars—than the original quote.
The final numbers included a $200 site inspection fee, a $350 documentation fee, and a $50 usage tax. Hegel said none of these fees had been disclosed during his discussions.
Upon learning of these additional demands, Hegel spoke with his agent, who agreed to remove the site inspection fee since that wasn't going to be performed, and to revert to the quoted price for the document fees. However, he was told some of the fees were unavoidable despite their not having been included in the quote.
Particularly disturbing, Hegel said, was that fact that the monthly quoted price had changed and could not be adjusted, according to his sales representative, who explained that his hands were tied by the financial institution they worked with. At this point Hegel was told that since the leasing company couldn’t honor the quote, they could offer him a refund. He accepted the refund offer and in the meantime he contacted another leasing company and initiated a deal with them.
Then a couple days later, the original lessor then said they could do the deal. However, Hegel wanted to end the first deal and go with the second. What followed was a tremendous amount of wrangling between the sign shop owner and a leasing company involving lawyers, e-mails, threats, and reprisals spread out over several weeks who was supposed to be working in his interest to provide a financial solution.
It’s important to keep in mind this was a particularly bad experience and can’t be considered a typical situation. Hegel admits he didn’t pay as much attention to making the deal as he should have. “I don’t believe all lease companies work exactly this way, but obviously some do,” he said.
Choosing the Proper Partner
There’s a multitude of leasing companies ready to serve any sign shop owner willing to sign an agreement, and as with any business arrangement it’s essential to be sure your potential partner is legitimate, forthright, and truly working with you. Working with a financing company that has experience in the sign industry is also essential.
Nancy Fragus, vice president of strategic development for Chase Industries (www.chaseindustries.com), has extensive sign industry experience along with several years in the equipment finance industry. “When looking into a lease you want to find a direct lender who understands the signage business and one that has a straightforward approach to equipment finance,” she says. (Fragus also says it’s crucial to “know whom you’re doing business with and find out if they are endorsed by an organization such as the International Sign Association.”)
Selecting a leasing company specializing in the industry can allow them to customize a deal and services in a lease agreement and offer advice on what lease options make sense for types or even brands of equipment. It’s worth doing the research to determine if the potential lessor has the sign expertise you require.
Take the time to thoroughly evaluate the prospective lessors and the leasing options they offer. You are seeking a true business partner, one who will offer solid customer service, attentiveness, and carefully explained answers to all your questions.
Conducting a reference check with the existing customers of the financing company is a must prior to making a final decision. Ask the equipment financing company to provide contact a few references of sign industry businesses similar to yours. Then ask the references some questions such as:
* How satisfied they are with the lessor, and their customer service?
* Are they pleased with their actual lease agreement?
* How helpful was the leasing company during the application process and the paperwork?
* Did they encounter any problems with the leasing company in terms of making (or even missing) payments?
* Would they work with the company again, and/or recommend them to a colleague?
Additionally be sure to compare rates and agreements (as Hegel did) of at least three or four financing firms. And while low lease rates certainly represent a strong pull, don’t base your decision solely on price. Be sure to factor the equipment type and cost, the expected lease term, and your options at the end of the lease into any comparisons. Comparing apples to apples in this process is essential. It’s also imperative to realize that the quotes, as Hegel learned, will not likely be 100 percent accurate, but they are supposed to be still reasonably close.
Credit Where Credit is Due
O’Sullivan says that it’s key any lessee is aware of their credit score and the fact that entering a lease will require a credit bureau accessing their credit report. “However, it’s important to note that we don’t only finance for businesses with perfect credit,” he adds. “We understand small businesses and are used to working with them in dealing with financial adversity they might have faced.” However, the better one’s credit rating the lower his lease rates will be.
Direct Capital Corporation (www.directcapital.com), located in Portsmouth, New Hampshire, is an equipment leasing company focused on small to medium sized companies looking to finance new or used equipment. The company does a significant business in the sign building industry.
Direct Capital Database Marketing Manager Elizabeth Luekens says shop owners must be aware of their credit rating because much of the lease financing approval is based on the credit score. “It is wise to review your personal and business credit routinely,” she advises. “Request a Dun & Bradstreet report annually to identify errors that may be hurting your credit rating. Frequently, mistakes that have been resolved with the creditors are not updated on the report.”
Another thing to watch out for, according to Fragus, is a lease that includes an automatic renewal or “evergreen” clause, which self-renews each year unless the lessee gives notice of its termination within a specified period of time.
Find the Fine Print
O’Sullivan states that it’s extremely important to read carefully all documents and seek the advice of the shop’s financial advisor when pondering a lease agreement. While small business owners are very pressed for time, when entering a leasing agreement spending the time to really understand the documents and agreements is advisable.
“Our goal is to make sure the end-user [sign shop] is happy,” O’Sullivan comments, adding that one of the primary ways of keeping customers happy is making sure they understand their agreement. “When it comes to additional fees and costs in a lease, the vast majority of sales representatives working with leasing companies will be upfront. When customers finance with us, all of the assets must be listed on the lease agreement and we do our best to provide documents that are very clear about what the customer is paying for and what they will be expected to pay over the course of the lease.”
In Hegel’s case, paying closer attention to the detail in the documents would be among a number of things he’d do differently, but he was extremely grateful he’d kept records of everything that happened during his bad lease experience. “You need to be sure you have read all of the offer paperwork and all of the final paperwork—including the fine print,” he says.
But in the end, Hegel reverted to the old saying: “If a deal sounds too good to be true, it’s probably not much of a deal.” And while the majority of sign making equipment leases aren’t too good to be true, it’s certainly case of “lessor beware.” Do the due diligence and enjoy the impact your properly crafted and researched lease can provide.
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