Why Companies Lease

Why do 8 out of 10 companies lease some, if not most, of their equipment?

Why is 30% of all capital equipment in America leased?

Leasing offers many benefits compared to other financing methods

Tax Deductions

The IRS Says an operating lease is not a purchase. That’s because lease payments are treated as expenses on a company’s balance sheet. Instead, it is classified as a tax-deductible overhead expense. 
Benefit: You can deduct the lease payments form your corporate income taxes. Plus, leasing gives you an immediate tax write-off. And you do not have to depreciate your equipment over five to seven years. 

Balance Sheet Management

An operating lease is not considered a long-term debt or liability. 
Benefit: It does not appear as a debt on your financial statement. This makes your company more attractive to traditional lenders. 

Capital Conservation

Certain types of leases help you better manage your balance sheet and improve your overall financial picture.
Benefit: You can conserve operating capital and free up working capital and bank credit lines for inventory, expansion and emergencies. 

100% Financing:

With leasing, there is no down payment. Leasing is equivalent to 100% financing. 
Benefit: You will have more money to invest in other revenue-generating activities. 

Flexibility:

You can add or upgrade your lease at any point during the lease term. You can also add installation, maintenance and other services to your lease. 
Benefit: Leases are more flexible than traditional financing.

Customized Solutions

You can custom-tailor a program to fit your cash flow needs. 
Benefit: You can create a program that fits your cash flow, budget, transaction structure, and cyclical fluctuations.

Asset Management

You may use the leased equipment for specific periods of time at fixed payments. The lessor assumes and manages the risk of equipment ownership. 
Benefit: At the end of the lease, the lessor is responsible for the disposition of the asset.

Upgraded Technology

Leasing allows you to keep up with the latest technology. 
Benefit: You will never get caught with obsolete equipment and you can upgrade or add equipment to keep up with the competition. 

Speed

You can respond quickly to new opportunities with minimal documentation and red tape. Typically, your lease will be approved within one or two days. 
Benefit: You can quickly obtain your leased equipment.

Improved Cash Forecasting

Your lease payments don’t change. You will always know the amount and number of lease payments. 
Benefit: You can accurately forecast cash requirements for your equipment.

Flexible End-of-Term Options

At the end of the lease, you can return the equipment, renew the lease or purchase the equipment. 
Benefit: You have the freedom to do what is best for your company. 

Tax Benefits

The tax benefits of ownership are passed on to you in the form of lower monthly payments. 
Benefit: You will enjoy many tax advantages

Improved Earnings

Operating lease accounting provides a lower cost than a capital lease in the early years of a lease. 
Benefit: Your earnings will improve. 

Purchasing Power

Leasing allows you to acquire more and/or higher end equipment.
Benefit: Purchasing power is increased. 

When choosing an independent lessor, like Pacific Rim Capital, Inc., for your Material Handling Equipment (MHE) needs, it is important to understand the leasing process.


The Lifecycle of Your Deal:

1. Select Vendors and Equipment

  • Lessees have full control of choosing their vendor, manufacturer, equipment specifications and negotiation of unit price.
  • Once a Lessee agrees to the unit price with a manufacturer, PRC can begin to price the transaction.
  • When the Lessee awards its first transaction with PRC, PRC and the Lessee must first negotiate a Master Lease Agreement (“MLA”) with PRC. The MLA lays out the terms and conditions for the relationship between the Lessee and Lessor.

2. Negotiate an Equipment Lease Schedule

  • While the MLA will include general terms and conditions that govern the relationship, the Equipment Lease Schedule (ELS) includes terms that pertain to a specific transaction or equipment type.

3. PRC to Issue Purchase Order to Equipment Manufacturer

  • Once the Lessee executes and returns the ELS to PRC, PRC would then be authorized to issue a Purchase Order (“PO”) to the equipment manufacturer. The vendor will then manufacture and deliver the equipment to the Lessee’s facility.

4. Equipment Delivery and Documentation

  • When a vendor is ready to deliver the equipment, they will provide an invoice to the Lessor.
  • Invoices provide specific details about units, such as price, delivery date, location, etc.
  • This information will be provided on lease documentation – to ensure that the units we have been invoiced for are, in fact, the units that the Lessee received.

5. Lease Commencement

  • Once all equipment has delivered and invoices have been received, the lease is then ready to commence.
  • To commence a lease, the Lessee must sign an Acceptance Certificate (“AC”), which states that the Lessee has inspected the equipment, the equipment matches what has been ordered, and the equipment is operational.

6. Management of Assets

PRC provides additional personalized, hands-on support throughout the life of the lease by:

  • Providing account and administrative assistance when you need it.
  • Tracking your assets throughout the course of the lease ensuring that come lease end, you have maximized your ROI and your equipment has gotten the most of its useful life.
  • Giving our Lessees direct access to our STREAM Customer Advantage Portal®

7. End of Lease

When the lease is coming to maturity, the customer has a few options. They can:

  • Return the equipment
  • Purchase the equipment
  • Renew the lease terms
  • Do nothing (this then becomes a month to month rent schedule.)
  • PRC is here to coach you through your end of lease options and make an educated decision based on the previous lease terms and begin a new deal lifecycle.

The lifecycle of each deal moves through the same stages regardless of the company you choose to finance your Material Handling Equipment (MHE). However, the company you choose to work with for your leasing needs plays a large role in seeing who will deliver the lowest total cost and maximize the return on investment of every asset. 

By taking the time to research and choose a company like Pacific Rim Capital, Inc. to manage your financed MHE, you will be able to get customized solutions, competitive pricing, and fleet optimization services among many other costs saving benefits. In addition, you will also have access to knowledge and expertise to help you be prepared to make your experience seamless.

Is Month-to-Month Rent Your Best Option Come Lease End?

When a lease matures, the lease payment will extend on a month-to-month rent basis until the Lessee gives notice to return the equipment or extend the lease. If a Lessee fails to make a decision, then they are leaving money on the table.

Before your lease automatically converts to a month-to-month rent, consider what your operating expenses are and identify opportunities to save.

Month-to-Month and Expected Useful Life

Month-to-month rent occurs as a default provision of the law. If a lease matures and there is no secondary agreement, a lease will automatically renew on a month-to-month basis until the lease is extended or terminated.

In terms of equipment leasing, leased assets are typically new. This means that rents are calculated based on a new asset. If a lease has gone month-to-month, then a Lessee is paying the same rent for a used asset that they were paying for a new asset.

An asset begins to depreciate the moment a user turns a unit on. In terms of forklifts, if an asset has been in rotation for 3-5 years, the asset will reach its economic useful life [insert link to useful life blog]. Once an asset hits its economic useful life, the maintenance costs begin to spike, and the asset begins to cost more to maintain than to replace with a new asset.

If you allow your lease to automatically convert to a month-to-month rent, it is very likely that your monthly payment will remain the same as when the asset was new.

Month-to-month rents should be managed closely. PRC’s proactive, consultative, and professional approach to asset management will help you identify cost-saving renewal opportunities to help you maximize your working capital and minimize opportunity costs.

Is Month to Month Ever Necessary?

In some cases, month-to-month rent may make sound business sense for a short period of time. These scenarios include:

  • Lessees who have a new equipment requirement and need to cover the time period between their current lease and a new equipment order
  • Lessees who need a piece of equipment that is not quite released yet

Both situations consider month-to-month rents as short-term or intermediary solutions where a lessee is waiting to decide for something or waiting for something to deliver. It rarely makes sense to use month-to-month rents as a long-term business solution.

How Can an PRC Help You Maximize Cost-Savings at End of Term?

The key to maximizing your cost-savings is managing your assets. We are dedicated to managing your portfolio to maximize your cost savings. We scrutinize data to ensure there are no surprises at lease end and help to make sure you are not leaving money on the table.

PRC will manage your portfolio and provide custom cost-saving solutions. When your lease comes to term, PRC will arm you with expert knowledge to provide you with the best possible solution for your equipment.

Conclusion

Lessees should avoid over exposing themselves to month-to-month rent. The overall goal is to maximize your ROI in the long run and be aware of where your lease is in every stage. Don’t get stuck overpaying on assets that should have been replaced years (or decades) ago.

There are scenarios where month-to-month rent is beneficial – but those are typically in short-term solutions. The way to maximize your ROI is to consider renewing or replacing before your equipment has reached its economic useful life and avoid spiking maintenance costs.

PRC is here to help you navigate through your lease and do the asset management for you. And, since we are not brokers or banks, we can do so with a simple and straightforward goal of helping you, the customer, to get better results.

How Will FASB ASC 842 Affect Lease Accounting and Your Business?

The Financial Accounting Standards Board (“FASB”) have begun implementing the new accounting rules for leases this year.

At the high level, FASB Accounting Standards Codification (“ASC”) 842 reduces some of the financial advantages of leasing by placing operating leases on the balance sheet and modifying how companies account for rentals. However, before diving into the technical aspects of lease accounting, let’s make sure we cover the basics.

What is a lease?

In a lease, one party obtains the right to use an asset legally owned by another party for a period of time.

Under the FASB model, a lease was classified based on whether the arrangement effectively purchases an asset. If a lease transfers the control of the underlying asset to a lessee, e.g. equipment has no value at the end of term or lessee can purchase equipment at a nominal value at end of term, then it will be classified as a finance lease.

Otherwise, where a lessee obtains control only of the use of an asset for a limited duration and the equipment retains value at the end of the lease term, the lease will be classified as an operating lease.

How will FASB ASC 842 affect accounting methodology?

For lessors, accounting methodology remains largely unchanged. For lessees, there are significant differences.

Historically, operating leases were not placed on the balance sheet. This provided value to lessees who were motivated by financial engineering or those who sought to mitigate expenses on their books. In addition, the new FASB rules have also changed the methodology for depreciating rentals. Previously, rentals were expensed in a straight-line depreciation. Now, rentals will be considered a depreciating asset called a “Right to Use” which, is an asset that Lessees do not own, but must place on their books.

When will ASC 842 go into effect?

ASC 842 will go into effect for the annual period beginning after December 15, 2018 and the calendar year 2019 for public entities. For other entities, ASC 842 goes into effect for annual period December 15, 2019 and the calendar year 2020. Public entities that present three years of income statements and cash flows must prepare the balance-sheet effect of the adoption of ASC 842 as of January 1, 2017.

What are the effects of the ASC 842?

Experts believe that the new standard will have a material balance sheet impact on about 80% of companies. In addition, the new rule will have a substantial financial impact on public companies. It will add millions of dollars in liabilities, in some cases billions, to corporate balance sheets.

What must your business do to implement ASC 842?

Successful implementation of ASC 842 requires considerable time, resources, and expertise. All things that most businesses lack – especially when it relates to non-core business activities. So many companies appear to be dragging their heels when implementing the new standard.

According to a Q4 2018 study conducted by PwC, only 4% of public company respondents had completed their ASC 842 implementations with 91% of respondents stating that they had not yet completed or started the assessment.

The main challenges to implementation include the consolidation and population of lease data, data analysis, and enhancing or changing systems, processes, or controls. Furthermore, due to the complexity of the new lease accounting rules, most companies must upgrade or modify their existing accounting system or implement new systems to handle the accounting requirements.

Here are a few steps to consider for your company:
1. Review all equipment lease and rental contracts
2. Identify technology requirements
3. Review debt covenants
4. Seek out expertise and counsel
5. Enact a plan and execute

What is the impact of ASC 842 on the future of equipment leasing?

The good news is that the future remains bright. A majority of U.S. business finance their equipment acquisitions and will be able to do so under ASC 842 for the following reasons:

  • Tax Management – Leasing allows lessees to manage taxes, by allowing lessors to pass benefits through lower rates.
  • Financing – Lessees are still able finance the entire cost of equipment, software, and services without a down payment
  • Cash flow management – Lessors are still able to create smaller, flexible arrangements while the equipment generates revenue.
  • Hedge against inflation – Leases allow lessees to lock rates to avoid future inflation