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To Say the Leased

Ownership is overrated. Could leasing be the answer to the tough economy?
February 1, 2002
URL: http://www.entrepreneur.com/article/48214

When Kai Adams opened Sebago Brewing Co. with partners Brad Monarch and Timothy Haines in South Portland, Maine, two years ago, he leased $30,000 worth of computers for the brewery and restaurant's point-of-sale system and a $4,000 dishwasher for the kitchen. Now that the 95-employee company is opening its third location, the 29-year-old brewmaster is opting to lease even more of the equipment necessary to get up and running.

"Now is a good time to be doing that," Adams says. "We don't have to buy all this equipment, so it frees up some cash for us." Adams bases his decision, in part, on some of the perennial advantages of equipment leasing, namely, lower upfront cash outlay and the ability to offload maintenance tasks onto the lessor. But, based on the increasing volume of inquiries from financial institutions interested in setting up leases for him, he also thinks the current environment creates something of a lessee's market.

A lot of other entrepreneurs agree. According to a 2001 survey of small businesses conducted for Entrepreneur by the Equipment Leasing Association (ELA), 70 percent of owners expect business to slow, and most of those expect to increase use of equipment leasing to help deal with the slump.

Surveying its own executives, ELA estimates leasing activity will be up 6 percent this year over last. That forecast was revised down from the 8 percent increase expected in April, but it's still a healthy increase given that the overall economy should grow much less.

Experts agree that leasing makes more sense for entrepreneurs right now. For one thing, during downturns, tightening credit standards at traditional lenders tend to steer small firms to seek financing from leasing companies, according to Jim Merrilees, executive vice president at leasing firm Firstcorp in Portland, Oregon. "The first people to jump out are the banks," Merrilees says. "So more and more credit applications flow to nonbank financial institutions."

Lower leasing costs also matter. Leasing is generally more costly than buying--although every lease is different, and it takes a cash-flow analysis looking at depreciation, maintenance and other items to accurately compare leasing with borrowing or paying cash to purchase equipment. But it's also generally true that leasing today costs less than a year ago, which is spurring more people to look into it, says Merrilees. "And with the cost of funds where they are now," he adds, "you can get a reasonable deal."

Uncertainty is also a factor, never more so than today. "It's a better time to lease now than in good times," says Jay Fudemberg, CEO of Pure Markets Corp., a San Francisco provider of online markets and tools for users and providers of leasing and secured financing. "Your revenues and earnings are probably down, so you want to preserve cash. A lease allows you to obtain something you need without a large capital outlay and without the risk of not being be able to return it if you don't want to continue to own it."

Leasing is no panacea in any economic environment, however. For instance, although you may be able to return leased equipment at the end of your contract, you may have to keep making lease payments on a costly new piece of equipment until the end of the contract, even if business slows so much that you don't need it and would like to get rid of it.

Still, for now, leasing looks good for many entrepreneurs. "I have companies calling me looking for people to lease equipment," says Adams. "There are a lot of lenders out there. And with all these interest cuts, it's pretty aggressive."

:: ONLINE EXCLUSIVE ::
  • www.elaoneline.com: The Equipment Leasing Association has an online Lease Assistant to help you get a grip on the basics of leasing, evaluate types of leases and other options, start the search for a leasing company and more.
  • www.puremarkets.com: Puremarkets.com provides an online marketplace where companies can present their financing needs to financial institutions as well as tools for analyzing financing options and managing portfolios of leased equipment.

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