As the big IWF show in Atlanta comes closer, naturally many shops are considering major equipment purchases. But before they fall in love with that shiny new machine at the show there are a few things they should consider besides just the machinery specifications, and that includes financing.

We talked with three financial experts to explore five key areas that should be considered and some of the pitfalls that should be avoided. William G Sutton, CAE, is president and CEO of the Equipment Leasing and Finance Association. Kevin Mellon and Joan Peterson work as a team specifically handling financial arrangements for woodworking equipment at SCM Group USA.

1. Choose your options carefully.

Sutton says that financing options today boil down to three basic options: Bank affiliated financing, independent financing, or captive financing. All three have plusses and minuses to consider.

Bank affiliated financing includes financial service companies, commercial banks, and investment banks, but equipment financing is just a part of what they do. “Equipment finance and activities are intermingled with other bank functions, utilizing internal funding sources,” said Sutton.

Independent funding sources work directly with the business, but they also might provide a broad range of financial products and services.

Finally, the so-called “captive” financers are connected to the manufacturer or supplier of the equipment. Mellon and Peterson note that sometimes the manufacturer or supplier financing can offer faster qualifying. “With our application-only program, we can qualify a three-to-four-year business with good personal credit quickly with the app and a copy of the first page of their company’s most recent three months of bank statements,” they said.

2. Leasing vs. purchasing.

Sutton says that seven out of 10 companies use some form of financing when acquiring equipment. That might include loans, leases, and lines of credit. Financial flexibility is one reason for that. “Financing versus spending cash, and particularly the type of financing employed (lease vs. loan) can help mitigate the uncertainty of investing in a capital asset that may not yield the desired return or increase efficiency, cost savings or future sales,” said Sutton.

Financing can help to improve expense planning by maintaining cash flow and consistent budgeting, he added. In the case of leases, some can be tailored to business cycle flexibility particularly if the business has regular seasonal ups and downs. Leasing might also be an attractive option to help avoid the risk of owning obsolete equipment as technology rapidly changes.

No piece of equipment lasts forever, and Sutton notes that sometimes a finance arrangement can even account for eventual disposal of equipment that is out of date. “You may essentially outsource the equipment management function so the financing company can handle its disposal or resale when it’s time to retire the asset,” he said.

Mellon and Peterson note that the choice of lease or purchase depends on many factors individual to each business. “Our lenders are familiar and comfortable with the equipment so there is no delay to research what they are financing,” the said. “This results in a faster-turnaround time, keeps the customer’s bank line of credit open for other purposes.”

3. What are the tax implications?

Tax issues affecting equipment are in constant flux, and anyone considering an equipment purchase or lease is well advice to consult with professional tax advisers. That said, there are some specific issues to consider.
For example, Mellon and Peterson note that, in 2013, Section 179 of the tax code allowed a deduction limit of $500,000, limit on capital purchases for $2 million and a 50-percent Bonus Depreciation. “For 2014, as of June 9th, Section 179 has been restored to its original limits of $25,000 plus an adjustment for inflation,” they said. “There is currently a bill in Congress proposing a higher Section 179 deduction limit, along with a permanent extension of the tax provision, to help US businesses purchase more equipment, hire more workers and maintain a better bottom line.”

Besides those specific tax issues, Sutton advises that good financing or lease arrangements can respond to individual company needs. “For example, tax-oriented leases produce lower rents, since the lessor retains title and depreciation. In a tax-oriented lease, the lessor takes advantage of the tax benefits in the transaction—depreciation, interest deduction, etc.—and passes these benefits on to the lessee in the form of lower rents,” he said.

For tax purposes, lease payments an allowable tax deductible overhead expense from corporate income, Sutton said. “This eliminates depreciating owned equipment over five to seven years, in accordance with IRS schedules,” he explained.

4. Choosing the financier.

Sutton urges companies seeking new equipment to consider the financier as a part of their business team. “Even more important than the type of financier is how well the financier understands your particular business,” said Sutton. “The more your equipment finance company understands your business, the better it can address a variety of factors to help you achieve a successful outcome.”

He recommends choosing a financier that takes into account your individual company needs and requirements, such as cash flow, budget, tax issues, transaction structure, and cyclical fluctuations. Custom lease terms that address those issues are a “key reason that businesses lease,” he said.

Mellon and Peterson note that financing from a manufacturer or supplier can offer options such as the ability to buy down the equipment to make the interest amount more favorable. “In house leasing companies, such as SCM Group Finance, have long-term relationships with our lenders and have more leverage to make deals happen due to the volume we produce,” they said.

5. Avoiding common mistakes.

“For those businesses that want to stay competitive, it is critical to be strategic about how you acquire equipment,” said Sutton. “Lease financing is a viable option for acquiring equipment and it's important to know the ins and outs so that you can negotiate what's best for your company. The more questions you ask, the more information you will have in order to make an informed decision about lease financing.”

He listed these key areas that would-be equipment buyers should always consider before making financing decisions:
•How will the equipment be used?
•How well does the equipment finance company representative understand my business?
•What are the total lease payments and costs?
•What happens if I want to change or end the lease early?
•What is my responsibility if the equipment is damaged or destroyed?
•Do I have any other obligations for the equipment?
•How can I upgrade or add equipment under this lease?
•What are my options at the end of the lease?
•What procedures must I follow if I choose to return the equipment?
•Are there any extra costs at the end of the lease?

In line with that Mellon and Peterson say “customers not doing due diligence on leasing companies” is one of the biggest problems they encounter. They also caution buyers about “working with lenders who offer approvals with an ‘application fee’ that most times never gets returned if the deal does not get approved or does at a much higher rate that quoted.”

Sutton perhaps sums up the issue best when he said, “For those businesses that want to stay competitive, it is critical to be strategic about how you acquire equipment. Lease financing is a viable option for acquiring equipment and it's important to know the ins and outs so that you can negotiate what's best for your company.”

To learn more about equipment financing or to find an equipment finance provider for your startup or small business, visit www.EquipmentFinanceAdvantage.org. The site also contains informational videos, types of financing, a glossary of terms, a lease vs. loan comparison and questions to ask when financing equipment. To contact Mellon and Peterson directly, email [email protected] or [email protected].