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Lease to Grow

What do I need to know to account for lease-vs.-own decisions in my company's financial strategies?

As with so many things, timing is everything in a lease-vs.-buy decision for equipment. Interest rates go up or down; capital becomes easier or harder to get; new laws get passed or are allowed to lapse; customers become more or less eager to buy; and a company grows or shrinks.

Key Takeaways
  • Financial flexibility is paramount during economic recessions and uncertain times. Leasing may be a feasible option due to lease terms and costs, while owning equipment can be expensive and difficult to dispose of.

  • Disposing of owned or leased equipment varies and is something to take into consideration. If your business no longer needs the owned equipment, it can be a very time-intensive process. However, with leasing, your leasing company can handle the stress for you.

CFO

In uncertain times, financial flexibility becomes paramount. Bob Bedford, a Growth Leader for Access GE, comments on his customers’ thought processes: “Instead of buying something, they may say, ‘Well, I know I am going to pick up a new project, so I’m going to rent the equipment I need for six months.’ Then when the project is done, they don’t have to keep that piece. They don’t know yet if they’ll have another job, so they leave themselves the option of just walking away.”
 
CFO Bill Wettstein says that his firm, Nussbaum Transportation Services, has used just that type of approach to make additions to his fleet of tractor-trailers over the past three years: “We expand it with rentals, and then once we know we have the growth, we increase our order of trucks.” 
 
Indeed, “that’s one of the beauties of leasing,” adds Tom Moosey, a marketing manager with GE Capital. “Not everybody is ready at the end of 36 months to make a decision. You might say, ‘I’ve got six more months in the contract. Let me hold off.’” 
 
“You have to be careful about owning the equipment,” Moosey advises. “Make sure that you consider what to do with that equipment when you don’t need it anymore. It’s a very, very time-intensive and costly process to go through on your own. With a lease, you can let your leasing company do that for you.”
 
Steve Ragaller also finds that kind of flexibility a necessity for certain lines of business, but not for everything. He’s CFO of Cretex Companies, a diversified manufacturing company that produces everything from concrete pipes that get buried in the ground to very small components that are used in implantable medical devices. “Operating leases give us an opportunity to react if the technology requires,” he says. They are not as useful in the concrete business, where he doesn’t expect much to change over the years.
 
What it often comes down to, says Ragaller, is this: “If it is a very unique, specialized piece of equipment, typically we have a strategic reason for acquiring it and so I’ll more than likely purchase it. But if we have fifty of the same types of equipment, it becomes less of a strategic decision and it’s more a commodity. I might lease a certain number of those to account for demand fluctuations, and then I can flex that stable of equipment as needed.” 
 
On top of that, adds Ragaller, the company’s financial position can dictate what actions are available and what’s off the table. “When we first started doing these operating leases, during the recession,” he says, “we had to deal with some credit agreement limitations at the time, so they had to all be off-balance-sheet. Now that we’ve successfully renegotiated our credit agreements, we have more options.”
 
His bottom line: “We will look at each purchasing decision or each acquisition decision independently, and we’ll look at a number of things.”
 
Nussbaum Transportation’s Wettstein agrees that nothing remains fixed in stone. Wettstein continually adapts his financing strategies to the changing times. For example, with the hopes of spurring capital investment in the aftermath of a global recession, the U.S. Congress enacted the “bonus depreciation” program to make tax advantages for new equipment more widely available. Combined with near-zero interest rates, says Wettstein, “that made it a very attractive time to grow the fleet.” 
 
But going forward, both the economy and the company have made progress, so “those two factors [bonus depreciation and interest rates] may come a little bit out of play. Now, it’s really the demand for our services, which has been strong the last year. That has spurred us to do a little more financing than we would have in a more moderate environment”—reducing the risk as business fundamentals strengthen.
 
And in good times, pulling the trigger on an early buyout option (EBO) can even be a way to inject equity into a company. It all depends on the timing.
 
Larry Signorelli explains how it’s worked for the marine transport company where he’s CFO, The Vane Brothers Companies: “I’ll give you a ballpark example. Let’s say you have a $6 million EBO on a $10 million vessel. But in the buyout year, the fair market value may still be $10 million because of the increase in our business. If we let it go one more year, we would have to buy it back at the fair market value of $10 million. Right there, that’s $4 million in equity.” But the company isn’t locked into the EBO. That gives Signorelli options. For example, he explains, “let’s say the industry goes down. Then I could just turn the equipment over to the lessor when the lease is up. That’s one advantage to leasing.”
 
It can get complicated, but GE Capital’s Moosey provides some final words of advice: “Your sales rep and your dealer reps know enough to take you through the multiple layers that you need to think through when deciding to lease a piece of equipment. You shouldn’t be looking at one particular solution without looking at all your options.” In other words, make the financing fit the times.
 

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