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Managing Your Business Costs Through Leasing

Written by  Richard "Bo" Bodo

2010julyP26

Today, leasing is used by 88 percent of businesses to manage their capital purchases and finances. Historically, the cleaning industry has not used leasing, opting to pay cash for equipment instead.

 

However, due to changes in today’s economic climate, cleaning professionals must become familiar with financial tools like leasing.

Leasing offers the flexibility of handling possible budget constraints through monthly payments. Instead of allocating a large portion of a company’s budget up front, the company (large or small) can lease the equipment to fulfill immediate needs while earmarking the rest of the budget towards other income-producing areas. Through leasing, you also have the flexibility to acquire more equipment. For example, instead of allotting your entire budget towards purchasing one piece of equipment, leasing allows you the opportunity to purchase more equipment that better services your current needs without the large initial capital outlay.

Additionally, lease programs and payments can be specialized to your business needs. Standard purchase options can adjust your monthly lease payment amount and offer a variety of “end of lease” options including purchasing the leased equipment. While there are a wide variety of lease options available, some of the most popular include Fair Market Value (FMV), 10 Percent Purchase, Zero Down, Deferred Payments, Step or Skip Payments, Seasonal or even 90 Days same as cash.

The most common purchase option would be the $1.00 Buyout Lease. This allows a company to acquire the leased equipment for $1.00 when the lease term is finished. An easy way to look at it is that a $1.00 Buyout Lease is in essence a loan. It has a higher monthly payment; however the option to own at the end of the lease is the cheapest. Much like buying a car and financing it through a bank or finance company, you have a set payment for a set term, and when you have made all the payments you own the car. A $1.00 Buyout Lease works the same way with one exception: you owe $1.00 at the end to purchase the equipment, hence the name. Furthermore, since you have agreed to purchase this equipment it is listed as an asset in a company’s financial record during the lease.

Since a $1.00 Buyout Lease is essentially a purchase, the equipment is typically depreciated for tax purposes over five years, which simply means you take the purchase price of the equipment, divide by five, and that is the amount that can be deducted from net earnings for the next five years. Interest is also deducted, which generally amounts to about 10 percent of the payment.

$1.00 Buyout Payment Example:

• $12,000.00 equipment price (which may include extended warranties, installation, shipping, etc.)

• 36-month term

• $408.72 per month excluding sales tax, or more importantly $102.18 per week.

For additional flexibility, if you are working on a cleaning contract with a set number of years to the term, why not choose an FMV lease with a term that matches the contract? For example, a FMV lease would allow you to have a three-year lease, lower than a $1.00 Buyout monthly payment and a matched term to the contract that you hold with your current customer. At the end of the contract term you can turn in the equipment—which means that you are not stuck with outdated machines—and re-lease new equipment for new contracts.

An important note about turning in equipment is that it must be clean and maintained. Again, back to the car analogy, if you go mud- bogging everyday with your 2007 Honda Accord and expect to turn it in with no penalties at the end of your lease you may be in for a surprise. The leasing company allows for wear on machines, not abuse. Always remember, a clean machine is a happy machine! Which lease program is right for your needs and tax incentives? The simplest word of advice is to consult with your tax professionals and get their input since they should know the inner workings of your business. There are tax benefits that are unique to each plan.

Provided by WINDSOR INDUSTRIES.

richard_bodoRichard “Bo” Bodo is the director of training at Windsor Industries and an IICRC master textile cleaner. An internationally published writer, Bo has more than 11 years of industry experience with a background in both chemicals and equipment. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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