Leasing has become much more than an alternative to traditional financing for acquiring business equipment and vehicles.

Many business owners and financial officers consider leasing an effective strategy offering flexibility, convenience and control for managing finances that provides immediate cash-flow benefits, simplifies equipment upgrades, may bring significant tax advantages, and helps achieve short- and long-term company goals.

“Leasing of all types of equipment is a trend that continues to grow, and construction equipment is consistently among the most-leased types of equipment,” said Ralph Petta, vice president of industry services for the Equipment Leasing Association (ELA). “We track numbers, and construction equipment is always near the top.”

Results of an ELA survey released earlier this year reported that equipment managers and consultants participating in the study ranked construction equipment at the top of leasing’s “what’s hot” category for the third consecutive year.

The ELA forecasts that $229 billion worth of equipment will be leased in 2006, ranging in company size from one-person shops to Fortune 500 corporations. Value of leases will be from a few thousand dollars for office equipment to millions for cogeneration facilities.

Equipment leases are written by many financial institutions, including industrial finance companies, distributors, banks, companies affiliated with manufacturers and independent leasing firms, many of them serving specialized markets such as the electrical industry.

Providing information for this report are Graybar Financial Services (GFS), the division responsible for leasing at electrical distributor Graybar; North Star Leasing, a medium-size leasing company based in New England; and TRS-RenTelco, one of North America’s largest test equipment leasing and rental companies.

“Leasing equipment will continue to be popular with electrical contractors because businesses often need to work within tight budgets, maximize their cash flow, and use the latest technology,” said Stuart Jaeger, manager of Graybar Financial Services.

The most-leased electrical tools for GFS, said Jaeger, are conduit benders, cable pullers and cable feeders. For datacom work, the most leased include fiber optic cable splicers and network analyzers.

“The primary benefits of leasing generally don’t apply to low-cost items,” Jaeger said. “The minimal capital outlay required doesn’t constrain cash flow like purchasing more expensive items could. For example, contractors do not usually lease electrical testers because of their relatively low purchase price. Also, lower-priced tools typically don’t become obsolete as quickly as more expensive high-tech tools and testers.”

A frequently cited benefit of leasing is the flexibility it offers with a variety of types of leases to fit individual customer needs. For equipment and tools leased by electrical contractors, Jaeger said two types of leases are most often chosen.

“A common lease structure is the $1 purchase option, also known as a conditional sale contract or full pay-out lease,” he said. “This 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. Two advance payments are generally required. Most contractors want to keep their tools and choose this type of lease over other options.

“Fair market value leases are also available, which allow contractors to buy the equipment, return it or trade it in on upgraded equipment at the end of the original lease term. 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. 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. Leases for vehicles and construction equipment are typically fair market value leases.”

Many factors must be considered when developing a financial strategy that may include leasing.

“As with any capital equipment acquisition, a contractor’s budget and cash flow are significant considerations as to whether equipment is purchased or financed,” Jaeger said. “Financing defers the cost of the equipment over several years, and this enables the equipment to pay for itself while in use. Also, 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.”

In general, Jaeger said GFS lease transactions are conducted with a contracting company as opposed to individuals.

“However,” he said, “we complete a number of lease transactions with new contractors with 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.

“In addition to leasing tools and test equipment, GFS specializes in financing complete projects. This capability enables a contractor to provide a customer with a complete turnkey solution that includes the equipment, labor, maintenance and other services necessary to complete the project for an affordable monthly payment instead of a significant cash outlay.”

North Star Leasing, Burlington, Vt., is a medium-sized company that operates nationally and writes leases for all types of businesses equipment for a variety of clients, including electrical contractors.

“Customers often come to us through resellers of tools and equipment,” said Kyle Albee, general manager. “Many businesses find our programs attractive as we have very competitive rates, offer a very low minimum lease amount of $1,000 and no penalty for early payoff.”

Albee said North Star does not often execute leases specifically for small hand-tool items, but that tools may be financed within a larger lease package.

Electrical contractors, said Albee, do lease high-end testing equipment and small man lifts, along with larger equipment such as generators, excavators and trailers. Additionally, North Star leases truck bodies containing toolboxes to haul contractors’ tools and equipment.

“Leases run from one to five years with seasonal lease options,” he said. “North Star also leases equipment for customers of electrical contractors, again including generators as a permanent backup source along with walk-in coolers and many other types of equipment.

“North Star has traditionally covered the electricians’ costs of installation when equipment is put on lease for their customers such as walk-in coolers, air conditioners, HVAC systems,” he said.

TRS-RenTelco specializes in testing equipment and, unlike GFS and North Star, also rents products.

“In today’s competitive environment, it is important to control operating expenses,” said Kristina Van Trease, director of marketing and business development. “Leasing and renting test equipment are ways to keep tight control on costs, while providing the breadth of equipment necessary to meet changing job requirements, and they are increasingly important options for electrical contractors.

“Leasing and renting options allow companies to manage cash flows and peak demand periods without having to invest in equipment that might not be fully utilized throughout the year. They also allow contractors to bid on jobs that they might previously have passed on due to test equipment requirements they could not fulfill.”

For electrical work, Van Trease said the greatest demand is for power quality analyzers, ground testers, resistance test sets, protective relay test sets, circuit breaker test sets and chart recorders. In the datacom market, there is strong demand for Category 5/6 cable testers, fusion splicers and optical test equipment.

“Leases for testing equipment are very similar to other capital equipment leases, but much easier to execute; a customer can receive the equipment within 24 hours of receipt of a purchase order, which is critical when there is a deadline to meet.”

The economy often is a consideration when considering financial options.

“While the leasing industry is growing, it is subject to fluctuations in the economy as are other areas of business,” said Petta. “Interest rates impact leasing. A generalization is that as interest rates rise, leasing is more attractive because leasing offers fixed rates. Lower interest rates encourage debt financing.”

That said, leasing proponents are quick to point out that many benefits of leasing apply, regardless of interest rates or other general economic factors.

“My advice to the client would be to evaluate each equipment acquisition situation separately,” said Jaeger. “Budgets, cash flow and obsolescence are all factors that should be considered whether a company elects to lease their equipment or purchase it outright.

“As the economy improves, businesses will need to have the equipment and infrastructure in place to satisfy the growing demand for their goods and services. We expect that they will utilize leasing when acquiring equipment to satisfy this demand.”

TRS-RenTelco’s Van Trease believes leasing and renting give contractors a competitive edge that can help their businesses grow.

“I would suggest,” she said, “that contractors take an honest look at how often the equipment will be used. For equipment used on a consistent basis and [if] there is not a high technology obsolescence factor, the best option may be purchasing the equipment outright or through a capital lease.

“For items that are infrequently used, subject to a high probability of obsolescence, or associated with high maintenance and upkeep expense, the contractor may be best served by meeting equipment needs with a short- or long-term rental. The decision also may be driven by cash-flow considerations.” EC

GRIFFIN, a construction and tools writer from Oklahoma City, can be reached at 405.748.5256 or up-front@cox.net.