Leasing equipment

[Ric]

Has anyone ever leased equipment? How did it work out for you? Would you do it again?

 

[Buzzie8]

Before getting into the car wash business I was in the equipment leasing business for a good part of my professional life. I currently have two leases with my car wash, an LED sign and reclaim system. Leases have a few advantages, usually a quick credit turnaround time, and less paperwork. Rates are usually higher than a typical commercial loan (plan on the 6%-9% range if done through a local bank). Many banks do not have good commercial loan programs for small ticket equipment purchases other than leases. Depending on structure, a lease can be viewed as a capital lease or an operating lease. Capital leases are treated the same as a cash purchase when it comes to taxes. Operating leases will allow you to write off monthly payments as operating expense. You will find that most small ticket leases will be treated as capital leases. Make sure that there are no "evergreen" clauses that will extend the lease beyond the original term. Also, know that in most cases, a lease will be full pay-out. Which means that if you decide to pay it off early there are no advantages and you will basically pay all the remaining payments, not just remaining principal. Talk to your accountant. Biggest advantage, quick and easy.

 

[Earl Weiss]

For some leases you need to exercise extreme caution. As a disguised financing vehicle the stuff is not lease from the mfgr but from a third party who buys the stuff and leases it to you. That third party is not responsible for warranties or quality of material. If it turns out to be junk or te company won't warranty it you are stuck on the lease.

Have had several guys try to get me to put in an ATM on this basis promising alll sorts of returns and rebates. When I discovered it was a third party leae deal I told them no way since I'd be on the hook if the ATM company went BK or the machine broke. Sure enough the reps all told me not to worry the companies were solid and wnderful . I told them great they could lease it from the finance company and then lease it to me with a lease I could break if the ATM company did not live up to the deal or keep the machine working.

Of course they wouldn't do this which meant the company was great so long as they weren't on the hook. Some of these companies did go BK and the ATM was then a paperweight and people who leased them were on the hook.

 

[Buzzie8]

Earl,
You are correct in your assumptions and observations, although most third party leasing companies are quite protective in who they will represent as vendors, mostly for the reasons you stated. M

My recommendation, if you want to lease, is to get an equipment quote from whatever company you want to buy equipment from then check your local banks to see if they have a leasing department. A lot of small banks will have one or two guys doing this for them. Or they will offer you a loan with similar or possibly even better terms.
Buzzie

 

[Ric]

So do you agree with the comparison chart shown in this article which was printed in Professional Carwash and Detailing magazine?

http://www.carwash.com/articles/86982-financing-for-a-carwash?page=1

 

[soapy]

I have leased several IBA over the years, usually with a $1 buyout. A big advantage to a lease is that you will not have to come up with money up front. Local banks now usually require very large down payments on equipment purchases some as high as 50%. Some leasing companies will also let you put other expenses such as electrical setup etc. into the lease. The paper work savings over dealing with a bank is also a advantage. I use a company that specializes in car washes only. Send me a message if you want contact information.

 

[Buzzie8]

So do you agree with the comparison chart shown in this article which was printed in Professional Carwash and Detailing magazine?

http://www.carwash.com/articles/86982-financing-for-a-carwash?page=1

I just read the article you posted. It is somewhat confusing to me. If you are purchasing an existing car wash, I guess you could buy the real estate and do a sale/lease back for the equipment portion. This would be non-conventional for most banks and leasing companies. You could also do a land lease for the real estate which is a bit more common in retail development. I am assuming you just want to acquire new equipment and want to know the advantages of leasing over traditional bank financing. As other's mentioned, little to no down payment, fast credit approval, are among it's benefits. Higher rates are it's down side. I would always first go to a local bank for their rates before going to a national broker I think you will find their rates more favorable and their lease "gotchas" to be minimal.

 

[robert roman]

Generally speaking, equipment lease has higher cost of capital than a loan and would reduce business return on investment over the length of agreement as compared to loan regardless of size of equity injection.

This holds true unless the new machine has lower operating cost, produces more cars and hour or increases average revenue per car.

The math is indisputable.

 

[Earl Weiss]

Generally speaking, equipment lease has higher cost of capital than a loan and would reduce business return on investment over the length of agreement as compared to loan regardless of size of equity injection.

This holds true unless

The math is indisputable.

OK , color me confused.

I agreee that the cost of Capital for leasing is higher than the cost of capital; for a loan.

I have no idea how this changes ("This holds true unless") when "the new machine has lower operating cost, produces more cars and hour or increases average revenue per car."

How does the lower operating cost, greater efficiency or average revenue increase affect the relative cost of capital for leasing versus a loan?

 

[soapy]

The biggest advantage of leasing IMO is the lower up front cost. A typical IBA will cost 100K + with installation. Banks often want 50% down on this type of purchase. Most car wash operators do not have this kind of cash laying around. Leasing can aid many operators in getting the first IBA or replacing a very old machine. The maintenace savings in replacing a older machine can offset the increased costs of a lease. In any lease I would try to get a clause that offers no early payoff penalties.

 

[robert roman]

“How does the lower operating cost, greater efficiency or average revenue increase affect the relative cost of capital for leasing versus a loan?”

It doesn’t, it affects ROI calculation.

“The biggest advantage of leasing IMO is the lower up front cost.”

It also drags down business ROI.

“Most car wash operators do not have this kind of cash laying around.”

Over-leveraging is one reason some SS owners as well as some people who lease cars get in a bind.

“The maintenace savings in replacing a older machine can offset the increased costs of a lease.”

The maintenance savings would have to be huge to cover the difference between lease and loan payment.

 

[Earl Weiss]

“

Over-leveraging is one reason some SS owners as well as some people who lease cars get in a bind.

IMNSHO one of the biggest reasons for the nations mortgage mess.

No one cared about the total cost over time. Only what it cost per month.

 

[soapy]

For some operators the lease option may be the only way they can add a IBA or other large purchase. It can still lead to a increase in bottom line profits through added sales even though it may not be the maximum way to do it.

 

[portski]

In these leases, what is the collateral?
I know, its the equipment, but we all know how fast the value of that evaporates.
So I guess that answers my next question...can you secure a lease on equipment without signing personally, based on the credit worthiness and financial strength of your business?

 

[Buzzie8]

Most leases in our industry will be credit based leases vs collateral based leases. It will be very rare for a lessor not to require a personal guarantee for small ticket transactions in any industry (under $1m) that deals in small business transactions. Most banks or lessors want small business owners to stand behind their businesses with a PG.