Why buy anything that can be leased? Let someone else take over many of the burdens and costs of ownership.
That is the attitude of many American businesses today who believe that leasing is preferable to owning anything, from heavy construction equipment and vehicles to office computers and handheld staplers. The Equipment Leasing Association (ELA) said that 80 percent of America's companies lease some or all of their equipment.
Many electrical contractors find leasing a viable alternative to traditional financing, and many of them lease tools and test equipment in addition to larger items. Compared to ownership, leasing offers several advantages owners and managers of contracting companies find attractive:
°Little up-front money is required to initiate a lease
°Payments of “true” or “tax” leases are completely deductible
°Leased tools and equipment do not appear as a liability on a company's balance sheet, so leases do not reduce lines of credit, credit status or bonding capacity
°Leasing simplifies updating equipment-under master leases, additional equipment can be added and old items returned and replaced with the latest models
°Costs of the leasing programs available today are very competitive with traditional financing methods
There also may be important tax benefits to leasing, but to evaluate the full impact of leasing compared to ownership, professional advice is needed from a company's accountant and financial planner.
There are plenty of sources anxious for your leasing business-the ELA said there are several thousand organizations writing leases today. They include industrial finance companies, distributors, banks and independent leasing firms, many of them serving specialized markets.
Leasing from an organization that understands a company's business and needs makes sense for most contractors who lease instead of buy.
Among those serving the electrical market is Graybar Financial Services, the division responsible for leasing at electrical distributor Graybar. Electro Rent Corp. and TRS-RenTelco specialize in leasing and renting tools and equipment to contractors engaged in electrical and datacomm work.
“Leasing is popular because of tight budgets, cash flow constraints and rapid changes in technology, which results in obsolescence of equipment,” said Stuart Jaeger, manager of Graybar Financial Services (GFS). “Leasing can help a contracting company stay more focused on its core business by providing a more efficient and convenient method to manage and dispose of equipment.”
Patrick Chu, Electro Rent director of marketing, said leasing has become more popular with electrical contractors as more have become active in datacomm work, which requires test equipment that is more expensive. It is also a market where product improvements come at a rapid pace.
“Competition has become so keen that contractors are looking for ways to lower operating costs, and they are looking for alternatives for acquiring less expensive testing equipment,” Chu said.
Kristina Van Trease, TRS-RenTelco director of marketing and business development, said leasing has become an increasingly important option for electrical contractors.
“Leases for products used by electrical contractors are similar to other capital equipment leases, but they are much easier to execute,” she said. “They help companies manage cash flows and peak demand periods. In the electrical market, we see the greatest rental demand for power quality and demand analyzers, circuit breaker test sets and chart recorders. In the datacomm market, we see rental demand for Cat 5/6 certification equipment and fiber optic installation and test equipment.”
All three sources said the relatively high cost and rapid obsolescence of datacomm testers make them among the products most often leased by electrical contractors.
GFS's Jaeger said the $1 purchase option, also known as a full pay lease or conditional sales contract is one of the most common types of leases for tools.
“This type lease allows the contractor to avoid a large initial cash outlay and pay for tools with low monthly payments over the lease period, typically 24 to 36 months,” Jaeger said. “Because most contractors want to keep their tools, they choose this type of lease over other options. Two advance payments are generally required to initiate the lease.”
Also popular are fair market value (FMV) leases-the same type of contract usually written for vehicles and construction equipment. With an FMV lease, the lessee has the option of purchasing the equipment at the end of the lease term, trading it in for upgraded equipment or returning it.
“If a contractor chooses to buy the equipment at the end of the lease, he will pay the fair market value, or residual value, to the leasing company,” Jaeger said. “If he returns it, no additional payments are required. If he opts for a trade-in, he will apply the residual value of the tool to a new tool lease or purchase.”
In addition to the type of contract that best suits a lessee's needs, the level of service can be an important consideration.
“Service levels will vary from being completely self service to full service,” Jaeger said. “In a self-service environment, a contractor completes his own lease application-often online via the Web, generates lease documentation, and follows up on installations once completed. In this environment, the lessor improves internal efficiencies by providing a minimum of personal attention. With a full-service environment, such as the one provided by GFS, the customer has access to a dedicated team of employees that specialize in working with contractors and resellers. Leasing representatives take care of the entire leasing process, including paperwork and documentation.”
In the electrical industry, contracting companies, not individual electricians, take out the leases.
“In general, a lease transaction is with the contracting company as opposed to an individual,” Jaeger said. “However, GFS completes a number of lease transactions with contractors that are new-less than two years in business. In these cases, the owners of the contracting companies sign a personal guarantee to back up the lease. This can be a great alternative for a company that is just starting out because they may not have the budget or available cash needed to acquire necessary equipment.”
According to Chu, most of Electro Rent's customers usually are companies and organizations, rather than individual electricians. Van Trease said TRS-RenTelco works with both contracting companies and individual electricians that need to test equipment.
Leasing isn't just for large companies.
“We work with electrical and communications contractors across the country. These companies range in size from the small mom and pop shops to the large national contracting companies,” said Van Trease. “Leasing provides both a great deal of flexibility for everyone.” EC
GRIFFIN, a construction and tools writer from Oklahoma City, can be reached at 405.748.5256 or firstname.lastname@example.org.