“Equipment Leasing - An Open Field”		«BACK
	by Dennis L. Monroe
	from Franchise Times, September 2003 Issue

One effective way to finance FF&E is through the use of an equipment lease. There are two basic types of equipment leases: operating leases and capital leases. In the simplest form of an operating lease, the lessor retains the tax benefits of owning the equipment. As such, the lessor is able to take advantage of any and all depreciation taken with respect to the equipment. The capital lease is a financing arrangement where legally it is a lease, but for tax purposes it is treated as a purchase and, therefore, the lessee receives the tax benefits. Leasing companies normally offer both operating leases and capital leases.

Equipment leasing has been around for a long period of time, and every franchise system should think about how they can effectively use equipment leasing. There are benefits to the franchisee because (i) there are no upfront expenses to purchase the equipment, (ii) the franchisee can generally obtain the most up-to-date equipment, (iii) the franchisee generally does not face any disposal issues at the end of useful life, and (iv) lease arrangements can be written to provide for reduced price purchase options at the expiration of the lease.

In addition to the operational benefits of equipment leases, there are also several significant monetary benefits as well. First, while equipment leasing is ripe with options for financing and structuring the lease, senior debt financing (even in the SBA sector) may be restricted in both areas. Second (and arguably most importantly), equipment-leasing rates are very attractive when compared to traditional financing. Although the rates for capital leases (which consistently range between 6 to 9 percent) may be slightly above bank financing; rates for operating leases generally range in the neighborhood of 1 to 3 percent – which is considerably below comparable bank financing for similar assets. In addition, when the new tax rules that allow for 50 percent bonus depreciation for new equipment is factored into the equation, the rate differences between traditional financing for operating leases are even more significant. A final economic benefit of equipment leases is the flexibility that equipment leases allow. Through the use of an equipment lease, lessors are allowed to be very creative. For example, they might include the cost of installation and some of the soft costs associated with installing the leased equipment into the lease financing.

An equipment lease also benefits the equipment lessor, because the lessor retains title to the assets at the end of the lease (in contrast to traditional financing, where the equipment merely serves as collateral). Under an equipment lease, the equipment is an asset of the lessor and the lessee is merely a tenant. Thus, if something goes wrong, the equipment lessor can quickly foreclose and take back the leased assets. An equipment lease is also an effective way to finance assets from a legal standpoint, because the lessor does not have to be concerned about lien rights and priorities because title to the equipment generally remains in the name of the lessor.

The franchisor can play a valuable role in equipment leasing. Franchisors may engage in various enhancements with the leasing companies to help them facilitate a lease program. Such arrangements are useful in “roll-outs” of new products, allowing franchisees to have the necessary equipment to offer the new products without a substantial upfront investment. Lease arrangements normally require minimal documentation. The leasing company’s primary concern is making sure they have title to the assets and in furtherance of that end normally require a bill of sale from the supplier to make sure the title is in the leasing company’s name. Many leasing companies do require personal guarantees, but in most cases it is 100 percent financing for the approved equipment and normally does not interfere with other types of financing the franchisee may have.

Where do you find equipment leasing companies? All major metropolitan areas have niche equipment leasing companies. Searching the Internet or checking the yellow pages to find equipment leasing companies are good places to start your search. In addition, most large financial institutions have a separate, non-regulated leasing company. Non-regulated companies are attractive sources because they can be more aggressive and may not require all of the covenants and conditions banks typically require. In addition, there are also national groups that specialize in franchise equipment leasing. Many of the large finance companies that presently serve as senior debt financing sources, originally started out as equipment leasing companies. In addition, many vendors have their own captive leasing companies that provide equipment to the franchise communities, and these equipment leases are involved in the national and respective local franchise associations and participate in the tradeshows.

In summary, equipment leasing can provide a very valuable approach to financing and should be considered when developing your financing options. When designing equipment packages and meeting capital improvement requirements, franchisors should also keep in mind the various options equipment leasing provides.