Leasing: A Powerful One-Two Commercial Financing Punch
By Tracy Eden
and entrepreneurs who have been in business for any length of time
understand the power of financial leverage. This is especially
important for manufacturing companies, which usually require a
significant investment in equipment, raw materials and inventory
before they can begin generating revenue.
The key to
success for most manufacturers is to spend as little out-of-pocket
money as possible on these expenses, thus preserving cash flow for
the actual operations of the business. When used properly, financial
leverage helps manufacturers do just this. Two particular kinds of
leverage can be especially beneficial for manufacturers: factoring
and leasing. When used together, factoring and leasing provide a
powerful one-two commercial financing punch.
Built on Cash Flow:
“All businesses are built on cash flow and leverage,
especially manufacturers,” says Andrew Kaplan, the president of
United Financial Group in Maitland, Fla., which specializes in
equipment leasing. “It doesn’t make sense for them to use all their
cash to pay upfront for something that’s going to generate income
when they can lease it instead. Also, if they spend all their cash
on equipment, there’s nothing left over for materials, inventory,
payroll, overhead, etc.”
leasing, you make a small down payment and then make monthly
payments on the equipment, usually for five years or less. When the
lease term is up, you can own the equipment by making a minimal
buyout payment (often just one dollar). Also, because a lease is
expensed, rather than capitalized, there are tax benefits to leasing
compared to buying equipment.
helps companies preserve cash and manage it more effectively,” adds
Steve Fix, a principal with LeaseSource, Inc., in Atlanta, Ga.
“We’ve done equipment leasing for Fortune 500 companies that could
write a check for a hundred grand without blinking an eye, but
recognize the cash flow benefits leasing provides.”
Going Hand in Hand:
Like leasing, factoring can be an important cash flow
management tool. In the same way that it’s usually not smart to lay
out cash to buy equipment, it often doesn’t make sense to carry your
accounts receivable, especially for slow-paying customers that may
not pay for 60 to 90 days or longer.
factoring accounts receivable, businesses accelerate their cash
receipts drastically while also outsourcing credit and collections,
thus freeing up owners to spend more time concentrating on core
competencies. “Factoring and leasing go hand-in-hand,” notes Fix.
manufacturing company, it might look something like this:
Manufacturing Co. needs to buy a new CNC machining center in order
to take advantage of a new government contract. The cost of the
machine is $100,000. While the company does have the cash to
purchase this equipment outright, it could lease it instead—say,
with a down payment of $5,000, and pay off the balance over the next
At the same
time, the company will need to purchase a large amount of raw
inventory, prepare their shop for the new machine, and hire another
employee to begin the new contract. Like many companies in similar
situations, XYZ is “cash poor” but “work wealthy”.
addition, XYZ has outstanding accounts receivable totaling $75,000
from customers that typically pay in 60 to 90 days. By selling these
invoices to a factoring company, it would receive up to 90 percent
of the outstanding accounts receivable (or more than $67,000) within
a matter of days to begin fulfilling its new government contract.
example, using factoring and leasing together could help XYZ
Manufacturing turn a profitable new opportunity into reality quicker
and more precisely than any conventional financing a bank could
properly maintained, equipment will still be making money for a
business for many years after it has been paid for,” says Kaplan.
“Every manufacturing business will eventually reach a threshold
where it can’t grow any more due to a lack of capacity. Factoring
and leasing can help companies expand beyond this threshold.”
a good example of an industry that commonly uses factoring and
leasing together, with powerful results. Trucks are usually leased,
requiring a small down payment in order to conserve cash, and
invoices are usually factored, which accelerates collections and
provides the cash needed to keep trucks rolling.
Automatic Cash Flow:
The bottom line is that it can be much easier to manage a
business financially by using factoring and leasing together,
because all you have to do is concentrate on your margin. Your cost
to lease and operate a machine is fixed each month, along with your
factoring cost, so it’s easy to set prices that ensure the level of
profitability you desire.
you’ve created a scenario in which the business is virtually
cash-flowing itself, and you can keep growing as fast as you can
sell products. Need to buy a new machine? No problem, lease it. Need
to collect receivables faster in order to keep the machine running?
No problem, factor them.
fast-paced business environment, where things change on a dime and
opportunities often arise with little or no warning, companies must
be nimble and flexible. Using factoring and leasing together can
provide the powerful one-two commercial financing punch you need to
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