ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: August 2007

Wednesday, August 22, 2007

Operating Leases Versus Capital Leases

There are 2 kinds of leases: Operating and Capital. Do the differences really matter to a company choosing to lease equipment (the lessee)?? Yes they do.

Operating leases are considered the more favorable of the two. An operating lease is defined as paying for the use of the equipment only. This means none of the costs or obligations or tax treatment of ownership applies to an operating lease. The lease is treated as an operating expense in the income statement and has no affect on the balance sheet. Its true 'off balance sheet' financing. This is favorable as most firms prefer to keep leases off the books so as to allow them to try to get conventional financing more easily the next time around.

In a capital lease, the lessee assumes some of the risks of ownership and enjoys some of the benefits. Consequently, the lease, when signed, is recognized both as an asset and as a liability (for the lease payments) on the balance sheet. The firm gets to claim depreciation each year on the asset and also deducts the interest expense component of the lease payment each year. In general, capital leases recognize expenses sooner than equivalent operating leases. There is an advantage and a disadvantage to this. If the firm (the lessee) is having a good year this year, then it's an advantage to recognize the expense sooner. However, if the business grows over the next few years as the firm hopes and expects it will, then it becomes more and more of a disadvantage. The operating lease has the same tax deductibility every year and it's every dollar of every lease payment tracked as an expense.

Thats the accounting and tax part. Now we have the real world differences. Primarily, the difference is in the residual value and buyout potential at the end of the lease. If a lease is structured with a $1 buyout at the end of the period, then automatically, we have a capital lease. The other two most common residual value buyouts of 10% and Fair Market Value can be either but usually lean towards operating leases for the tax reasons stated above.

ACH (Electronic Check Acceptance) Part 1

Automated Clearing House is a means of electronic funds transfer initiated by the banking industry and governed by the National Automated Clearing House Association (NACHA). ACH converts a check into an electronic stream which is transmitted from one source to another. A contract is created between the merchant or owner of a business and its clients. The contract is a mutual agreement authorizing use of this electronic stream for quickly moving money back and forth from client to business owner. The originator or business owner initiates the transaction by requesting a credit or debit of funds from the originating bank. The originating bank, in turn, requests a debit or credit from the receiver or client’s bank. The receivers’ funds are then debited or credited accordingly. The process is simple and user friendly. Strict regulations enforced by NACHA create a secure environment for the electronic check industry.

Checks typically clear in 7-14 business days. For businesses that work strictly on invoicing, this system of networks greatly reduces payment time and receivables on the books. ACH eliminates the need for collections, and instantly informs the user if client funds are available. Recurring billing is available and integrates easily into small business accounting systems. ACH is efficient, reliable, and secure.

Todd Rome

Tuesday, August 7, 2007

Why Equipment Dealers/Vendors Love Leasing

Many dealers/vendors of various types of equipment run into a problem when small businesses are their primary clientele. The problem is that those that need and use their equipment most often can't afford the 5k, 10k, 25k price tag up front to buy it. Financing the equipment themselves isn't an option for most dealers because they have to pay their suppliers for inventory and this would then put the dealer in the financing business, not the equipment business. They know equipment, they don't necessarily know financing.

Enter Equipment Leasing through a Commercial Finance Broker.

A dealer can work with an equipment leasing company (or multiple ones) to create a workable solution for everyone. Let's see how the 4 major players in this deal make out by way of a lease:

1) The Dealer: Gets full cash price with no discount. They don't have to worry about collections as they are paid and out of the deal. Its just like a cash deal to them. There is also potential for upselling as a nicer piece of equipment might only cost another 10 bucks a month. A win for the dealer.

2) The Client: Gets the equipment when they need it now with a favorable financing agreement to pay the equipment off over a 3-5 year period, much smaller more manageable payments. They make their payments to the Equipment Leasing Company and maintain a good relationship with the dealer for potential future purchases later. A win for the client.

3) The Equipment Leasing Company: Gets a new deal in their portfolio and collects the payments from the client. This is what they are in business to do and the client fits their portfolio requirements. A win for the equipment leasing company that funds the deal.

4) The Broker: Closes a deal that makes everyone happy and gets paid. A win for the broker.

A true win/win/win/win situation all the way around.