The IRS section 179 states that businesses can deduct the value of mission critical equipment directly from their income taxes in the year they put the equipment into service. This includes equipment financed through EFAs or Capital leases, as well as those paid for with cash or by bank loan. The 2008 Economic Stimulus Package increased this deduction from 128,000 up to 250,000 for the year 2008.
For instance, a business replaces $10,000 worth of computers and if they choose, the business can take advantage of the 179 deduction and deduct all 10,000 off of the current year's tax return.
The plus: if the business had an unexpectedly good year and has a taxable profit of at least 10,000 (the cost of the equipment), then its fully deductible.
The minus: if the business did tax planning all year long and didn't generate a taxable profit of 10k then they can only deduct an amount equivalent to their taxable profit, so their deduction can be limited. Also, the deduction all happens in that first year even if financed over a 3 or 5 year period.
Section 179 is a great tool for some businesses but as with most things, one size doesn't fit all. For some its a great fit and others are better off with one of the other 2 methods.
Monday, July 21, 2008
Monday, July 14, 2008
What do We Finance?
The study released in December 2007 using 2006 numbers for equipment financing shows us who finances (previous post). The study was conducted by Global Insight and entitled 'The US Equipment Finance Market Study' and the results were published in the Jan/Feb 08 issue of The Monitor.
Besides showing us who finances in the 600 billion dollar equipment finance market, the study teaches us some other things too.
What equipment types relied most heavily on financing? The # 1 type is trucks and trailers. The order:
1) Trucks and Trailers
2) Construction Equipment
3) Industrial Equipment
4) Office Equipment
While the equipment types financed are very broad, who finances is more concentrated than we thought. The top 5 states (California, Texas, NY, FL and Illinois) represented 37% of the entire US market.
The other groundbreaking piece in this study was evidence that financing is used all up and down industries and markets including being used by manufacturers in the creation of a product, distributors of that product, dealers of that product and end use customers of the product. Therefore, its use is much more accepted and mainstream than we may have thought.
Besides showing us who finances in the 600 billion dollar equipment finance market, the study teaches us some other things too.
What equipment types relied most heavily on financing? The # 1 type is trucks and trailers. The order:
1) Trucks and Trailers
2) Construction Equipment
3) Industrial Equipment
4) Office Equipment
While the equipment types financed are very broad, who finances is more concentrated than we thought. The top 5 states (California, Texas, NY, FL and Illinois) represented 37% of the entire US market.
The other groundbreaking piece in this study was evidence that financing is used all up and down industries and markets including being used by manufacturers in the creation of a product, distributors of that product, dealers of that product and end use customers of the product. Therefore, its use is much more accepted and mainstream than we may have thought.
Monday, July 7, 2008
Depreciation: Part 1
Depreciation is an important tax writeoff used when acquiring new equipment. For our example in this series, we are going to use a lease written for $100,000 worth of computers and software for 5 years.
The first way to depreciate is the book value method. This method allows for equal depreciation each year, in this case 1/5 of the value new, or $20,000. This means a 20k writeoff each year for the 5 years of the lease. This is the simplest method but not the most common.
Next we will look at 179 and then the MACRS.
The first way to depreciate is the book value method. This method allows for equal depreciation each year, in this case 1/5 of the value new, or $20,000. This means a 20k writeoff each year for the 5 years of the lease. This is the simplest method but not the most common.
Next we will look at 179 and then the MACRS.
Thursday, July 3, 2008
Who Finances??
The last entry was about helping community bankers retain their business clients who they cannot approve for loans. So are the only ones that finance those that aren't 'bankable'?? In a word, No. In fact, the average financed deal is in the B to B+ paper range, the range that just borders on what banks will finance for some of their better customers. Many deals are also in the A paper range for firms that prefer to lease or just dont want the hassle that goes with providing all the financials a bank will require, since most of our deals require a credit app and credit check only.
An extensive study was done with 2006 numbers and reported in The Monitor , the equipment finance industry's top trade mag and some interesting things came out aside from the credit range info above. By company size, the most likely companies to finance, in order, are:
1) 100-1000 employees
2) 50-100 employees
3) 1-50 employees
4) >1000 employees
The surprising piece in here to me was that 1-50 employees wasn't higher. Why not? Turns out that those in this range either believe they cannot get financing or are too new (meaning at the startup stage) that think or know they cannot get financed. Financing a startup is possible, although it is more difficult to do for us than if the business is past the 2 year mark. The end result is that companies in this range often will scrounge up the funds to buy their equipment outright, a severe waste of their operating capital.
The most common equipment types to be financed are : construction and related equipment, farm equipment, transportation and industrial equipment. The fastest growing sector year over year though is technology, specifically computers and software, which are now being financed more than ever before.
An extensive study was done with 2006 numbers and reported in The Monitor , the equipment finance industry's top trade mag and some interesting things came out aside from the credit range info above. By company size, the most likely companies to finance, in order, are:
1) 100-1000 employees
2) 50-100 employees
3) 1-50 employees
4) >1000 employees
The surprising piece in here to me was that 1-50 employees wasn't higher. Why not? Turns out that those in this range either believe they cannot get financing or are too new (meaning at the startup stage) that think or know they cannot get financed. Financing a startup is possible, although it is more difficult to do for us than if the business is past the 2 year mark. The end result is that companies in this range often will scrounge up the funds to buy their equipment outright, a severe waste of their operating capital.
The most common equipment types to be financed are : construction and related equipment, farm equipment, transportation and industrial equipment. The fastest growing sector year over year though is technology, specifically computers and software, which are now being financed more than ever before.
Wednesday, June 18, 2008
The Real Problem for Community Banks
Many of us are aware that the RE problem we are facing is really a banking/mortgage problem. The problem is especially acute for community banks. When a bank writes a bad loan, they have to set $$ aside, known as loan loss provisions, to cover the losses. This is $$ that is now out of circulation and cannot be lent out. So banks and especially community banks have even less $$ to lend to their business clients than they had a year ago.
Why does this hurt community bankers more? It hurts them more because they have a higher touch, more personal service, and typically care more about their business clients than a large mega commercial bank. All banks have to say No but if that no is a threat to their deposit relationship with the client (the most important relationship a bank has) then that's really problematic for the community banker. Community bankers are greatly affected because they don't have a leasing division like Bank of America does. Large banks will target community banker client deposits by promising an approval for a loan (usually a lease) to bring them in. Community bankers need their own leasing resources to help them retain their existing clients. If nothing else, a leasing partner helps them retain their deposit relationships, which in the end create the upper limit of how much $$ the bank can lend due to Federal Reserve requirements.
Why does this hurt community bankers more? It hurts them more because they have a higher touch, more personal service, and typically care more about their business clients than a large mega commercial bank. All banks have to say No but if that no is a threat to their deposit relationship with the client (the most important relationship a bank has) then that's really problematic for the community banker. Community bankers are greatly affected because they don't have a leasing division like Bank of America does. Large banks will target community banker client deposits by promising an approval for a loan (usually a lease) to bring them in. Community bankers need their own leasing resources to help them retain their existing clients. If nothing else, a leasing partner helps them retain their deposit relationships, which in the end create the upper limit of how much $$ the bank can lend due to Federal Reserve requirements.
Tuesday, June 17, 2008
Issues at Big Blue
IBM is the talk of the technology side of the commercial finance world. IBM has its own internal finance division known as IBM Global Finance. It is typically the # 1 choice for its thousands of partners, large and small, who have clients who need to finance their hardware, software, storage or networking gear purchases. Issues are coming out regarding their financing/lease contracts, confusing language in end of lease buyout options, lots of hidden fees and evergreening. Financial evergreening is when a client misses the window to determine whether or not they want to purchase the equipment or give it back at the end of the term and rather than convert to a month to month (which is the standard until the decision is made) they get charged for a whole additional year's worth of payments and have to hit the window the same time in the following year.
All these issues are at best sloppy and deceptive, and at worst, fraudulent and illegal. Dell got caught with their hand in the cookie jar and IBM may be as well despite their excellent reputation in the marketplace for products and services.
All these issues are at best sloppy and deceptive, and at worst, fraudulent and illegal. Dell got caught with their hand in the cookie jar and IBM may be as well despite their excellent reputation in the marketplace for products and services.
Tuesday, June 3, 2008
Dell Financial Services GUILTY
Reprinted from Channel Web http://www.crn.com
N.Y. Judge Rules Dell Engaged In Fraud, Deceptive Business Practices
By Scott Campbell, ChannelWeb
A New York State Supreme Court judge ruled Tuesday that Dell (NSDQ:Dell) engaged in fraud, false advertising, deceptive business practices and abusive debt collection in the state.
Judge Joseph Teresi said Dell lured consumers to purchase its products with advertisements that offered attractive "no interest" and/or "no payment" financing promotions. However, many consumers were denied those deals. The judge called it a "bait-and-switch" scheme in which consumers instead often received interest rates that exceeded 20 percent.
In his decision, the judge wrote, "Dell has engaged in repeated misleading, deceptive and unlawful business conduct, including false and deceptive advertising of financing promotions and the terms of warranties, fraudulent, misleading and deceptive practices in credit financing, and failure to provide warranty service and rebates."
Teresi also found that Dell deprived consumers of technical support to which they were entitled under their warranty or service contract by:
- Repeatedly failing to provide timely on-site repair to consumers who purchased service contracts that promised on-site and expedited service.
- Pressuring consumers, including those who purchased service contracts that promised "on-site" repair, to remove the external cover of their computer and remove, reinstall and manipulate hardware components.
- Discouraging consumers from seeking technical support. The judge found customers who called Dell's toll-free number were subjected to long wait times, repeated transfers and frequent disconnections.
- Failing to provide rebates that were promised to consumers.
New York Attorney General Andrew Cuomo's office filed a lawsuit against Dell in May 2007.
Dell issued the following statement regarding the judge's findings:
"We don't agree with the decision and will be defending our position vigorously. Our goal has been, and continues to be, to provide the best customer experience possible. We're confident that when the proceedings are completed, the court will determine that only a relatively small number of customers have been affected."
The Attorney General's office said consumers were often misled by Dell's practices. "Dell and [Dell Financial Services] frequently failed to clearly inform these consumers that they had not qualified for the promotional terms, leaving many to unwittingly finance their purchase at high interest rates," the Attorney General's office said in a statement.
"For too long at Dell the promise of customer service was a bait-and-switch that left thousands of people paying for essentially no service at all," Cuomo said in the statement. "We have won an important victory that will force Dell to live up to its responsibilities and pay back its customers for profits that were pocketed but not deserved. This decision sends an important message that all corporations will be held accountable for the promises they make to consumers."
In addition, Dell Financial Services (DFS), a joint venture between Dell and CIT Bank, incorrectly billed consumers on canceled orders, returned merchandise, or accounts it did not authorize Dell to open, according to Cuomo's office.
Dell also "continually harassed these consumers with illegal billing and collection activity. Although many consumers repeatedly contacted Dell and/or DFS to advise them of the errors, DFS did not suspend its collection activity and Dell failed to expeditiously credit consumers' accounts, even after assuring consumers it would do so. As a result, many consumers have been subjected to harassing collection calls for months on end and have had their credit ratings harmed," according to the statement.
The ruling by the court prohibits Dell and its DFS arm from engaging in the practices cited in the suit. Teresi also ruled the court will hold future hearings to determine restitution Dell would have to pay customers for profits "unlawfully earned," according to a release from the state Attorney General's office.
Editor's comment: Dell learned a harsh lesson about the financing business by thinking they could do this piece of the transaction themselves rather than hiring out expertise. This is the reason why most vendors use small independent financing companies rather than keeping a 'captive' in house financing company, such as the joint venture was in this case. It's too easy for the captive to engage in deceptive practices if they get to much 'in bed' with their vendor as CIT did here with Dell.
N.Y. Judge Rules Dell Engaged In Fraud, Deceptive Business Practices
By Scott Campbell, ChannelWeb
A New York State Supreme Court judge ruled Tuesday that Dell (NSDQ:Dell) engaged in fraud, false advertising, deceptive business practices and abusive debt collection in the state.
Judge Joseph Teresi said Dell lured consumers to purchase its products with advertisements that offered attractive "no interest" and/or "no payment" financing promotions. However, many consumers were denied those deals. The judge called it a "bait-and-switch" scheme in which consumers instead often received interest rates that exceeded 20 percent.
In his decision, the judge wrote, "Dell has engaged in repeated misleading, deceptive and unlawful business conduct, including false and deceptive advertising of financing promotions and the terms of warranties, fraudulent, misleading and deceptive practices in credit financing, and failure to provide warranty service and rebates."
Teresi also found that Dell deprived consumers of technical support to which they were entitled under their warranty or service contract by:
- Repeatedly failing to provide timely on-site repair to consumers who purchased service contracts that promised on-site and expedited service.
- Pressuring consumers, including those who purchased service contracts that promised "on-site" repair, to remove the external cover of their computer and remove, reinstall and manipulate hardware components.
- Discouraging consumers from seeking technical support. The judge found customers who called Dell's toll-free number were subjected to long wait times, repeated transfers and frequent disconnections.
- Failing to provide rebates that were promised to consumers.
New York Attorney General Andrew Cuomo's office filed a lawsuit against Dell in May 2007.
Dell issued the following statement regarding the judge's findings:
"We don't agree with the decision and will be defending our position vigorously. Our goal has been, and continues to be, to provide the best customer experience possible. We're confident that when the proceedings are completed, the court will determine that only a relatively small number of customers have been affected."
The Attorney General's office said consumers were often misled by Dell's practices. "Dell and [Dell Financial Services] frequently failed to clearly inform these consumers that they had not qualified for the promotional terms, leaving many to unwittingly finance their purchase at high interest rates," the Attorney General's office said in a statement.
"For too long at Dell the promise of customer service was a bait-and-switch that left thousands of people paying for essentially no service at all," Cuomo said in the statement. "We have won an important victory that will force Dell to live up to its responsibilities and pay back its customers for profits that were pocketed but not deserved. This decision sends an important message that all corporations will be held accountable for the promises they make to consumers."
In addition, Dell Financial Services (DFS), a joint venture between Dell and CIT Bank, incorrectly billed consumers on canceled orders, returned merchandise, or accounts it did not authorize Dell to open, according to Cuomo's office.
Dell also "continually harassed these consumers with illegal billing and collection activity. Although many consumers repeatedly contacted Dell and/or DFS to advise them of the errors, DFS did not suspend its collection activity and Dell failed to expeditiously credit consumers' accounts, even after assuring consumers it would do so. As a result, many consumers have been subjected to harassing collection calls for months on end and have had their credit ratings harmed," according to the statement.
The ruling by the court prohibits Dell and its DFS arm from engaging in the practices cited in the suit. Teresi also ruled the court will hold future hearings to determine restitution Dell would have to pay customers for profits "unlawfully earned," according to a release from the state Attorney General's office.
Editor's comment: Dell learned a harsh lesson about the financing business by thinking they could do this piece of the transaction themselves rather than hiring out expertise. This is the reason why most vendors use small independent financing companies rather than keeping a 'captive' in house financing company, such as the joint venture was in this case. It's too easy for the captive to engage in deceptive practices if they get to much 'in bed' with their vendor as CIT did here with Dell.
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