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Benefits of Equipment Leasing for Credit Processors
Here is some introductory information about a career as a processor in the equipment leasing business.
The ABC's of Leasing
A lease is simply a contact which the owner of a piece of property gives someone else the right to use it for a certain period of time, and for a certain payment. At the end of the lease, the user can renew the contract, buy the equipment or return it to the owner. Some installment sales contracts are called "leases" too because they contain important elements of leasing - things like no money down, longer terms or a flexible payment schedule. Installment sale, conditional sale or lease-purchase contracts are especially common when it comes to acquiring typewriters copiers, personal computers, telephones, job printing presses and other "small-ticket" equipment.
The growth of smll-ticket leasing (equipment under $25,000) is explosive. Small tickets account for at least one quarter of leasing's $100 billion volume, according to Michael J. Fleming, president of the American Associating of Equipment lessors. Whether it is a true lease or a purchase contract that looks like a lease, everyone—vendors, users and financiers - prefer to call it a lease. Leasing has become a buzzword.
Advantages of Leasing
Huge companies with many divisions often have a cumbersome process for approving large capital outlays. Expenditures that affect the balance sheet have to pass muster with the capital budget committee, which may meet only once a year. That is bad news for the division manger who suddenly needs a big piece of equipment, because his part of the business has grown way beyond what he expected when the submitted his annual budget. Leasing can help him get out of this bind. An "operating" lease can be recorded as an expense rather than a capital outlay.
"One of the biggest reasons people lease today is budgetary," says John J. Walters, president of DPF Group, Ltd., a leasing company that specialize in high-tech equipment. "You go in the capital committee and say: "I need a $5 million computer"; They say: "Its' not in the budget for this year. Go lease it."
Fixed Rates
The balance sheet was not one of the reasons by Primex Plastics Corp. chose to lease rather than own four extruder, at Primex's Garfield, N.J. headquarter and three other plants. The machines turn plastic resin into plastic sheets. As a closely held company, Primex can't raise capital by selling stocks or bonds on the public markets. So its options for acquiring the $2 million worth of equipment came down to these: pay cash, borrow from the bank, or lease. In the case of the extruders, Primex opted to lease, from TriContinental Leasing Corp., a subsidiary of Bell Atlantic Corp.
"We're profitable, so we do have ready cash," says Glen J. Ruffino, Primex's controller. "But we'd rather invest our cash in operating our business or expanding it, in hiring more labor or adding more space to our plants. That's why we like to leave our bank lines open, too. You always want to keep some kind of bank financing in your pocket, in case you need it."
Ruffino also likes the certainty that TriContinental's fixed-rate lease gave Primex. Bank loans usually have a floating rate of interest. "Floating is very nice when rates are coming down. But how low can rates go? It's got to end sometime," says Ruffino.
Short and Long
Leasing companies often are willing to put out money longer than banks. This means that for durable equipment, the user can more closely match his payments to his income from the machine. The equipment pays for itself over the life of the lease. If, on the other hand, the user knows he's only going to need the equipment for a short period of time, or if he's worried about technological change, he can choose a short-term lease. Again, he'll be paying for the equipment for as long as he's using it, and no longer.
While the investment credit helped reduce some lease rates, it also tended to make lease terms for rigid. Since an equipment owner needed five years to earn the full ITC, leasing companies preferred to write five-year leases, whether or not five years matched the useful life of the asset. Thus the ITC acted as a kind of a golden straight jacket.
"We've done a lot of business triggered around five years, regardless of the useful life of the equipment," says William J. Montgomery, President of Xerox Credit Corp. "Fork lists usually last a long time. There is no reason anymore why a lease on a forklift should be for only five years. With the investment credit repealed, flexibility has been restored to the term of a lease."