Leasing 101

Understanding the reasons why you should pursue leasing your equipment is the first place to start. With our decades of combined leasing industry experience, we have compiled this easy-to-use tutorial to help you understand the benefits of leasing. As always, you may visit our Application Center or call us at (877) 4-STRADA for assistance.

In deciding how to pay for an equipment acquisition, it is important to remember that … It Is The Use, Not The Ownership, Of Equipment That Generates Profits Before seeking out a bank for a loan to buy equipment, consider that there is a difference between ownership of equipment and use of equipment from the perspective of profit generation. The only time that ownership of an asset earns profit is when that asset appreciates in value – like real estate, patent rights; precious metals or collectibles. If it is an appreciating asset, it makes sense to own it. If it is not an appreciating asset, it is logical to gain the use of it for the time that you are going to need it. Leasing facilitates this goal. Another factor mitigating against ownership is that new technology is obsolescing everything that was “new technology” before, and that is something that is going to continue to happen in the future… only faster. So, given that most equipment is going to be worth very little very soon, ownership becomes even less desirable.
Leasing allows you to write off the costs of your present equipment as you use it, and to trade up to new technology when the time comes. Leasing is an extremely flexible tool. It can be structured as anything from a rental (think “car rental”) to a time purchase (think “lease to own”). For this reason, there are many different benefits of leasing and an equal number of motives as to why people lease.
Business people are lulled into thinking that paying cash is a good way to acquire equipment because doing so avoids finance charges and interest expense and results in lower total cash outlay. In fact, paying cash can be the most expensive way to solve the problem. There are two main reasons for this: (a) Liquidity Is Critical. You must have reserves. This can become an outright survival issue when slow paying customers, slow sales or unexpected expenses put pressure on cash reserves. On payday, your employees do not want to know how many people owe you money. (b) Alternative Uses Of Funds. If all you are going to do with the cash you conserve by leasing is to put in the bank at 3% or so, there wouldn’t be much benefit. BUT, there are so many other ways you can deploy your cash that offer huge potential returns. Here are ten things you can do with cash which you probably can’t do any other way: Build a cash reserve in case customers pay slowly. Book that big order and be able to pay for the raw materials to produce it. Take quantity buying opportunities. Get a bargain at an auction. Take cash discounts (2% each 10 days is a 72% return) Fund R & D projects. Fund new marketing programs. Hire your competitor’s top salesperson. Buy your competitor. Invest in appreciating assets such as real estate.
Article 179 Through a quirk in the tax laws, it is now possible to “get paid in advance” to add equipment. Small businesses can write off up to $100,000 of equipment the year they put it in service. It is not necessary to depreciate it over several years. By leasing that equipment, you can have the government pay it’s share in front, essentially getting free use for over a year. Example: You buy a $100,000 piece of equipment and finance it on a 60 month lease/purchase contract with a monthly payment of about $2200. If you’re in a 34% bracket, your first year write-off comes to $34,000, enough to make the first fifteen lease payments (34,000 2200 = 15.45). Direct Tax Expensing For companies not qualifying for or choosing the Article 179 alternative, lease payments are written off as made, eliminating the need for depreciation schedules and allowing faster write off. The result of this is more cash freed up for other uses than would be available in a purchase/depreciate environment.
Get 100% financing plus the additional funds to cover costs. Strada leases can cover everything you need to make your equipment work for you. This includes software, installation, related leasehold improvements, training and even some supply items. All of this reduces your initial costs to minimal levels, letting you earn profits from your new equipment faster
Leasing is a well accepted concept. Over 32% of all equipment acquired in the US is acquired under a lease contract. This makes leasing the single largest form of external corporate finance in the country. Over 80% of companies – from small start ups to “Fortune 500” giants – lease some or all of their equipment.
Lease payments can be matched to project revenues; seasonal cash flow variations; budget limitations and other challenges. The need to divert cash, or add to loan balances is removed. Our leases can be structured with no payments for up to six months, longer amortizations, and PUTs, TRACs or other optional alternatives to lower payments even further. Read more about Strada Capital’s Lease Programs.
We can structure leases to meet FASB requirements for “off balance sheet” accounting treatment. Since the total committed lease payments now show as a footnote rather than as a liability, the overall ratios are improved and there is less risk of lending covenant violations.
Banks charge lower interest rates than leasing companies, don’t they? Well, not exactly. That’s because rate per se, the cost per thousand dollars of equipment per month or the “interest rate” that is being factored into the transaction, is an unimportant consideration. Far more important are the terms and conditions of the transaction. The terms of your “low rate” bank loan usually require that you keep some money, perhaps 20% to 30% of the loan amount in a non-interest bearing account at that bank as “compensating balances” (so the bank is really lending you 70 cents of their money and 30 cents of your own money for each loan dollar). When you compute the real yield on that, you find that a five year 8% loan with a 30% compensating balance requirement is really about a 24% loan (because you’re paying interest on 100%, but only getting 70%). Using the same formula, a 20% compensating balance requirement makes their yield on that 8% loan almost 18% and with a mere 10% compensating balance, it’s still about 12.5%. So you have this “low” bank rate, but you have to leave part of the money in the bank. You also have covenants that require you to maintain certain financial ratios, the bank has filed a blanket lien against your assets and you are cross collateralized with your personal accounts, your kids’ trust accounts and everything else. There is probably a clause in the loan agreement that says that if at any time the bank feels uncomfortable with your industry they can call the loan even if you have made every payment on time, and another that says they can increase their rate if their cost of money goes up. Oh, and they probably didn’t want to finance the entire cost, preferring that you made a down payment. In short, there are terms and conditions that you probably didn’t know about and a rate effectively higher than you imagined. So it is pretty clear that the “rate” is not the only factor in making a decision on how to finance equipment. You have to look a lot deeper.
Banks are great for short term needs and you should use them in that way. An available line of credit is an extremely valuable tool to address unforeseen emergencies, therefore reducing those open lines by using them to finance equipment can be dangerous. Furthermore, bank terms, appetites and flexibility on equipment transactions range from “less than optimum” to “downright difficult”. Let your bank do what it does best.
Leases don’t include blanket liens, restrictive covenants, rate escalator clauses, “call anytime” provisions, compensating balance requirements (a five year 6% loan with a 20% compensating balance requirement actually yields about 15.7%) or any of those other nasty little surprises that tend to be part of traditional lending arrangements.
Strada leases feature simplified documentation, easy one page applications, no financial statements in most cases, accelerated approval times and more. All designed to get you the equipment you need without delay.

A typical lease finances as much as 110% of the equipment cost because it usually picks up delivery, installation and other soft costs. It only requires one month’s rent in advance; there is a UCC filing only against the specific equipment leased; and the leasing company won’t bother you for the next five years as long as you make your payments. At the end of that time, they will sell you the equipment for its then current fair market value (probably minimal); and you will have expensed the payments directly for tax purposes.

Furthermore, Strada Capital will vary lease payments to match your cash flow curves. If you are in a seasonal business, that can be a crucial benefit to leasing. We will also match the payments to the logical period of time that you will be using that equipment before it is necessary to upgrade; and will allow you to upgrade without penalty. These are just some of the “custom” features available in our leases that usually aren’t in a bank lending agreement, and they affect your net cost. So, when considering financing, look beyond rate alone to the underlying considerations. You may find that, sometimes, “it costs less to pay more.”