One Size Doesn't Have To Fit All
What equipment can you lease?
If your company needs it, you can lease it. Tom Moosey, a marketing manager for GE Capital with 27 years of leasing experience, sorts equipment leasing into four buckets:
In general, there are four categories for Equipment Leasing: Technology-sensitive equipment, Production equipment, Usage-based equipment and Longer-lived transportation equipment.
Many factors go into making the decision about when to use leasing and for what types of equipment.
In addition to the different features and benefits available through different types of financing contracts, the leasing arrangement can include such factors as market timing, the state of the economy and interest rates, legislative and regulatory actions, the company’s own financial position and history, corporate culture, and, of course, a finance company’s willingness to extend credit.
- Technology-sensitive equipment: This equipment includes laptop and desktop computers, medical imaging equipment, servers, copiers, office printers, and other types of equipment that a company is likely to replace on a shorter cycle, either because of technological obsolescence—a “better mousetrap” comes along—or due to simple wear-and-tear.
- Production equipment: Things like food processing equipment, machine tools, or other manufacturing equipment typically have a long useful life; a company would expect to use this type of equipment for many years in production before it needs to be replaced.
- Usage-based equipment: For this category of equipment, lease terms and conditions are tied to usage—for example, mileage, in the case of tractor-trailers or car fleets; or hours, in the case of forklifts and construction equipment such as excavators and loaders.
- Longer-lived transportation equipment: Included in this category are airplanes, helicopters, marine vessels (barges, tugboats, supply vessels), and railcars.
Equipment leasing can be a very effective tool for a CFO, offering flexibility in his or her pursuit of specific business goals, which themselves are constantly shifting to adapt to changing markets, economies, regulations, or strategic ambitions. Especially for the complex company of today, one size of leasing does not need to be wedged into all situations.
Cretex Companies, Inc., provides a good example of the need for flexibility. According to VP and CFO Steve Ragaller, the Minnesota-headquartered business started out nearly 100 years ago making concrete products for large-scale infrastructure projects. More recently, the company’s leadership decided it made strategic sense to diversify, and Cretex built a successful business line supplying intricate and sophisticated medical components for the medical device market. The company also has separate business lines in machine tools and in component manufacturing for the aerospace industry.
Today, Ragaller is just as comfortable talking about cardiac rhythm management, neuromodulation, and orthopedics as he is discoursing on concrete pipes and culverts. And, with such disparate businesses, the CFO finds it makes sense to adapt his financing strategies to the company’s business strategies.
According to Ragaller, the company tends to use leasing for the equipment needed to serve the more dynamic medical technology markets. Here, says Cretex’s CFO, demand can be “lumpy” and the manufacturing technology evolves rapidly. Under those conditions, the flexibility and avoidance of long-term commitments offered by leasing become even more attractive. For the more stable infrastructure segment, the company has been more likely to purchase the production equipment it knows it will be using for many years.
Other companies extend the benefits of leasing even more broadly. For example, like Cretex, the Musco Family Olive Company in California leases high-tech equipment. In this case, those are optical scanners—mission-critical and expensive pieces of equipment used to sort olives in the canneries. But CFO Scott Hamilton points out that Musco uses leasing for more run-of-the-mill types of equipment needs as well, such as for the computers and printers it uses in the company offices, and even for the forklifts rolling through its warehouses.
Many factors go into making the decision about when to use leasing and for what types of equipment. In addition to the different features and benefits available through different types of financing contracts, the leasing calculus can include such factors as market timing, the state of the economy and interest rates, legislative and regulatory actions, the company’s own financial position and history, corporate culture, and, of course, a finance company’s willingness to extend credit. Matching those calculations to the diversity of a company’s business needs falls squarely on the shoulders of the CFO.
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