Equipment Leasing for Importers


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TEFO Home About TEFO Management Team Products & Services Sign Up Trade Glossary Import Finance Tutorial Export Finance Tutorial	Equipment Leasing for Importers Introduction Growing Importer/Distributors often face the need to acquire new updated production equipment. Out right purchase of high cost assets can seriously impact a company's cash flow. Equipment Leasing is a financing option that helps Importer/Distributors acquire equipment vital to business operations without major capital investment . Leasing is defined as a means of financing under which the customer (Lessee) pays a Lessor for the use of equipment in regular installments over a contracted period of time. The key advantages of leasing in North America include potential tax benefits and the ability to adapt to the rapid changes of technology. Advantages of leasing are so compelling that it is considered to be one of the fastest growing means to acquire equipment in business today . According to the U.S. Small Business Administration, eight out of 10 American businesses lease some or all of their productivity equipment. The leasing industry is a major source of funds for capital investment for virtually all types of businesses - from local family companies to the Fortune 500. Over 30% of all capital equipment sold in North America is currently acquired through lease financing. In 2002, more than $229 billion worth of equipment was leased nationwide, mostly by smaller, growth and technology-oriented organizations. In North America , over 800 leasing companies are available to support a company's leasing needs. Only a few of these leasing companies have the expertise to provide advantageous equipment lease structured for Importers/Distributors . These leasing companies work with TEFO Example Sotaka Seeds of Watsonville, California is the one of the world's largest growers of vegetable seeds. The company had not kept pace with technology and decided to make a major capital acquisition to upgrade their growing technology. An Israeli company had developed an extroadinary web based computerized growing system for their own seed growing operation. They would sell the technology to Sotaka for $435,000. Sotaka considered a bank loan for the equipment, but discovered that they were required to pay a down payments of 25%. They considered leasing but found no leasing company that would structure a deal with an overseas supplier. Sotaka called TEFO to discuss acquisition financing possibilities. Our team evaluated the options and recommended n import lease structure. TEFO teamed up with our Import lease partner to customize a lease program to meet Sotaka's financial and equipment needs. The TEFO lease package provided the following: A five year capital lease covering 100% of the cost of the equipment The lease included the installation costs and the training package The lease required only one payment in advance Lease terms included an early buy out (EBO) option at three and five years Early buy out option was structured with limits on fair market value. Structured for Sotaka to gain tax advantages Lease payments to be treated as a pre-tax business expense When Sotaka weighed the opportunity costs of a straight out purchase against the lease payments, leasing offered a better solution. Sotaka elected the TEFO lease offering primarily for the following reasons: Sotaka would g et immediate use of the equipment with minimal up-front cost. The lease p rovided Sotaka more available capital for the operations and business growth investments. The lease was structured so that payments are treated as a pre-tax business expense The lease would not impact the company's bank credit thus keeping the bank lines open Features of a Lease Program 100 % financing - full cost of product with no down payment required Terms ranging from 24-60 months. Longer terms for major capital equipment Competitive fixed rates Simple one-page applications for transactions up to $75,000 Fast application process - one-day turnaround of credit decisions for up to $75,000 Two business-day turnaround for above $75,000 Fair Market Value (FMV), 10% Lease, or $1 Buy/Out end-of-lease purchase options Consistent, creative and competitive financing experience Direct, single-point-of-contact relationship State-of-the-art front end and back office automated support Leasing available for new and used equipment There is a UCC filing only against the specific equipment leased Advantages Typical lease finances additional equipment costs such as delivery, installation, taxes, maintenance, training More liberal terms than purchase financing Leased equipment can pay for itself as it generates profits Requires minimal upfront costs, commonly only one or two month's rent in advance Preserves funds and bank credit for other expenditures. Lease financing does not impact bank credit lines Lease payments on business equipment are 100% tax deductible Enables companies to regularly upgrade their equipment minimizing obsolescence Allows businesses to acquire equipment of higher quality and in bigger volumes Reduces paperwork and consolidates billing Eliminates the need to maintain complicated depreciation schedules Negotiating a purchase option under which a portion of your lease payments are credited to the purchase price is one way to effectively create equity in leased property. Normally, the lease does not commence until the equipment has been delivered and is in operating condition. Provides options to create subsidized rate programs to eliminate competition. Converts cash buyers of small machines to larger, more expensive purchases. Certain expenses such as installation, freight, and sales tax may be included in a lease. Lease payments will usually be lower than the payment required by other methods of financing. Predictable, fixed monthly payment plan that allows forecast of equipment costs Cost of equipment after-tax is typically lower through leasing than any other means of acquisition A choice of leasing programs to optimize tax advantage up to 100% tax deductible Tax benefits of a lease transaction are in most cases, more beneficial than an outright purchase. Leasing translates into less up-front cash and low monthly payments. Equipment leasing protects your company from having to keep obsolete equipment. Provides Trade-in, add on, and upgrade capabilities, allow you to make the needed adjustments as your business grows. Disadvantages Lease financing is primarily for companies established for over two years Leasing can be more expensive than conventional financing when potential tax implications are not taken into consideration. Most equipment leases are either non-cancelable or impose a penalty for early termination. Lease payments must be made on time. Leasing does not enable a company accrue any equity in the equipment. Lessees need to pay all maintenance fees and taxes Procedures Importer lease the product intended from the banks. The leasing company signs a leasing agreement directly with the importer (lessee). The agreement is tailored to the specific needs of the supply contract between the exporter and importer. The importer Lessee specifies the equipment and selects the vendor/supplier from whom it is purchased in accordance with the Lessee's precise specifications. The Lessee negotiates the purchase price of the equipment with the vendor. The leasing company receives a lease application from the Lessee and conducts a credit investigation. If the Lessee is approved, lease documents are prepared and sent to the Lessee for execution. The executed lease documents are returned to the Lessor A purchase order is given to the vendor/supplier to deliver the equipment to the Lessee and to invoice the Lessor. Potential Problems - Lease Agreement Long, complex lease agreements designed to confuse Additional fees that are built into a lease agreement. Low advertised lease costs with extra fees to compensate End of term options that cause you to pay a large sum of money to terminate the agreement Credit fees to process a credit application Commitment fees to hold the credit open Broker Fees to pay for broker participation Option to buy the equipment at a mutually acceptable price rather than at fair market value Fees to obtain clean title to the equipment at end of lease term Substituting a "Put" rather than an "Option" Delayed payment to the vendor to increase yield Copyright © 2004, 2005 Ted S. Eastman. None of the contents of this article may be reproduced or republished without the express permission of the author		We take your privacy and the security of your company's information very seriously. Please view our privacy and security policy.
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