Cash Flow Strategies for Business Owners – Winter 2007

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MDS Funding improves cash flow. Our services include the following financial tools:

- Commercial Receivable Funding
- Medical Receivable Funding
- Government Contract Funding
- Purchase Order Funding
- Asset Based Lending
- Merchant Cash Advance
- Equipment Leasing
- Cash Flow Consulting

Cash-strapped businesses should consider leasing, rather than buying, the new equipment they need to upgrade existing operations or to grow their business. According to the U.S. Department of Commerce's Bureau of Economic Analysis, more than 80% of all businesses lease some or all of their equipment. Many of these businesses turn to leasing not because they are short on cash but because they understand how leasing can be used as an integral cash flow strategy.

Businesses that lease include industrial firms, trucking companies, commercial printers, and even hospitals and other medical firms that use X-ray machines and similar equipment. Leasing affords you access to many types of equipment from copy machines and fax machines to delivery trucks, construction equipment and more.

With the rapid rate of improvements in technology, we’re seeing an especially significant jump in the number of businesses who are choosing to lease computer and communications technology, instead of purchasing, in order to avoid the risk of still owing money on outdated and legacy technology.

In this issue of Cash Flow Strategies, I'd like to share with you a little more about the advantages and disadvantages of equipment leasing so that you can make the decision that is best for your business. As always, if you have questions about choosing the right cash flow strategy for your business, please do not hesitate to give me a call.

Equipment Leasing Basics

The Equipment Leasing and Finance Association (ELFA), an industry trade group in Arlington, Virginia, explains the benefits of equipment leasing this way:

When you lease equipment, a manufacturer, dealer or lender either buys or already owns the equipment you want. In exchange, you make monthly payments to the owner (lessor). The monthly payment structure allows you to treat the payments as tax- deductible business expenses.

If you need equipment right away, leases are approved much more quickly than loans and involve less paperwork and more relaxed credit requirements. Many equipment vendors provide lease financing, as do a number of banks.

Maintenance of equipment is another expensive issue for most companies and another reason for leasing. Leasing is especially advantageous to a business that is not in the business of maintaining the machinery it uses.

Ultimately, if cash flow is an important issue, then Equipment Leasing is an attractive alternative.

For more information about the Equipment Leasing & Finance Association, visit: www.elaonline.org

Lifecycle Leasing

computer technician Leasing makes it easier to keep up with the pace of technology. This can be especially important if your business relies upon cutting-edge technology such as the latest computers, communication devices or other equipment. In many cases, a series of short- term leases (Lifecycle Leasing) can cost you less than buying new equipment every year or two. As a result, lifecycle leases are becoming the trend right now in leasing. This type of lease offers upgrades to equipment that has become outdated or obsolete.

If a manufacturing firm develops a new product line, for example, and needs machinery that is bigger or better, most leasing companies can accommodate the switch. High-tech users can stay current with hardware and software upgrades at pre-determined intervals.

Lease Negotiating Terms

· LENGTH OF LEASE: Set up a lease-term that doesn't extend too far into the useful life of the equipment. For example, you wouldn't want to lease 1,000 PCs for six years because of their probable technology obsolescence in three to five years.

· UP-FRONT PAYMENT: What is the amount of the up-front payment? Consider reducing the up-front payment by amortizing it over the life of the lease.

· DEPRECIATION: If you are procuring equipment that depreciates rapidly, consider a short- term agreement and negotiate a modern equipment substitution clause.

· TAX LIABILITY: Depreciation can be used to offset income for tax purposes. This can be beneficial with equipment that depreciates so quickly that the dollar value of depreciation can be applied against earnings to limit tax liability. Also, lease payments are a deductible operating expense. (For all tax-related issues, I recommend you consult with your CPA.)

· FAIR MARKET VALUE: Monitor the fair market value, or current resale value, of the equipment when deciding whether to return or purchase it at the end of the lease term. For instance, it may make sense to purchase leased equipment that maintains a high percentage of its original value.

· EARLY TERMINATION: Do you have the right to terminate the lease early? Most lessors will be reluctant to do this, but you may be able to negotiate an early termination clause that lets you pay a fee to cancel the lease.

· OPTION TO PURCHASE: Consider negotiating for terms that give you the option to buy the equipment. Equipment lessors will often give you this benefit at the end of the lease term, usually for a fixed price (e.g., 10 percent of the purchase price of the equipment) or at fair market value.

Different Flavors of Leasing

When you start comparing lease options, make sure you understand the different types of leases so you aren't comparing apples and oranges.

An Operating Lease is a lease for which the lessee acquires the property for only a small portion of its useful life. This type of lease is commonly used to acquire equipment on a short-term basis. An operating lease is not capitalized; it is accounted for as a rental expense.

In contrast, a Capital Lease is a lease that is classified as a purchase by the lessee by meeting one of the following criteria: the lease term is greater than 75% of the property's estimated economic life; the lease contains an option to purchase the property for less than fair market value; ownership of the property is transferred to the lessee at the end of the lease term; or the present value of the lease payments exceeds 90% of the fair market value of the property.

For greater detail about leases and their tax implications, see FASB- 13

Michael Moss

MDS Funding

email: mmoss@mdsfunding.com

web: http://www.MDSFunding.com

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