Every company, equipment rental or other, has wondered about and has been solicited by some leasing equipment company to “grow their business” while “preserving valuable cash resources” as opposed to the outright walk in and buy it option. While potentially effective for some industries (heavy equipment, food service/restaurant, expensive vehicle/trucks) leasing motion picture and television equipment is not the way to go.  Not now, nor ever.  But don’t take my word for it.  Read on:

Leasing companies would have you think that leasing preserves operating capital; but that short-term logic is poison to a rental company. By the end of the lease, if you choose to buy the lease out when completed, will actually cost you about twice the cash price.

I get called about four times a week from various leasing companies throughout the country bestowing the benefits of leasing. Know this: THEY LIE, CLOAK and CONCEIL. That’s how they make their living. They are not looking out for the best interests of your company, only their own.  Be careful - theses guys are trained to be slick operators.

EQUIPMENT IS SOMETHING YOU DATE, NOT MARRY
Here is an actual example of why leasing within our industry is not the way to go:

I selected some equipment back in 2005. All the new JVC stuff that was just coming out. GY-HD100’s, BR-HD50U decks, lens supplements, stuff like that. The bill got up to around $34,000. No fear – I’m just gonna’ lease it and keep my pocket full of money.

So I selected one of the dozens of leasing companies, submitted my paperwork, got approved (LIE #1: They will tell you it only takes a day or so to get approved and funded, it actually takes about a month to get funded). They offered me a few different pay options. I choose a 40-month lease to keep the monthly payment down and a 10% buy-out at the end. When done, I’ll be the proud owner of all that gear – how great !!! I must have been high. Turns out to be not so great – not even close.

After all the numbers came, at least the ones they want you to see, the out-of-pocket amounts began to grow. But OK, I know there will be some associated initial costs, so let’s go with it.

First there is added a brokers fee of 10% (add $3400.00 to the lease). Then there are the upfront fees: The down payment of 10% (another $3400.00). Then there is the first and last month’s payment ($1050.00 plus $1050.00). Oh yes, the UCC filing fee, the documentation fee, the statement fee and several other creative and unexplainable fees totaling an additional $500 to $600. All told, about $6000.00, roughly a fifth of the whole purchase amount.

Leasing companies don’t like to talk about “interest”. They won’t truthfully calculate the excess amount you will be paying above the real cost of the equipment. While not specifically interest, the same math that is used to calculate interest on a loan applies here as well.

When the sales vendor receives the PO and later the Cashier’s Check from the leasing company, you can go pick-up the gear. You sign a leasing company form stating that you have received everything you ordered and that it is complete and in good order.

Wow, that wasn’t very painful. But worst was yet to come. The equipment you just leased is not your property – it belongs to the leasing company. You’re in effect just renting it. You can’t trade it or sell it, even if it would be to a great advantage to your company and some guy is offering twice its value. You must insure the leasing companies property to its full value, even if the deductible is greater than the total value of the equipment (hence no real insurance protection).

If you have standard company insurance, which you should have, you’re covered. If not, the leasing company will externally insure it and the insurance fee will be added to the monthly payment. OK, that’s fine, it’s there stuff and want to be covered. Boy, are they covered.

So you’ve paid the $6000, you have the gear in your possession, and you await the monthly billing. Thirty-eight payments of $1050.00 equals $39,900; plus the up-front’s of $6000 equals $45,900.00. Without any other fees and expenses you are already at 50% interest, equivalent. But we’re just getting started.

COLATERAL EXPENSES
Usury was originally defined as interest on a loan. A fee to temporarily use someone else’s money. Now a days that term generally refers to interest charged above and beyond the legal rate. Even though a lease is not a loan, and the “usury” term may not be perfectly aligned, it is nonetheless applicable. (LIE #2: Change the language and wording to invite as much confusion as possible while not to appear in violation of banking standards and practices). Leasing companies are, if nothing else, creative. They seem to take their cues from the banking industry and used car sales.

Do you think 50% interest is usury? Me too. Buy wait - it goes up from there.

Everything’s rolling right along, you’re making timely and correct payments, time is elapsing and you are generating revenue in excess of the lease payment on the leased equipment. But recently something has changed. The once newest and most desirable equipment isn’t renting as well. New models have come out, and the popularity of the leased items has rolled off. Everyone wants to rent the newest stuff, and who can blame them. Why don’t you just sell off the older gear and buy new gear. Oh yea, you don’t own it so you can’t sell it.  And even though the rental revenues on those items is waning, or non-existant, the lease payment isn’t.

The mail just came in and who should this letter be from? Our friendly Tax Assessor’s Office. Seems the leased gear is subject to PROPERTY TAXES as if it were any other property. Take out your check book – it’s 1% time. Yes, you will pay about 1% on the leased equipment year after year, every year until the lease is over, and year after year even after you own it until you finally dispose of the once leased equipment. By then, it’s dust. While it’s only $350.00, but it adds up over the years.

Tax incentive, they say. (LIE #3:) That’s bull. The real-and-true cash money tax deduction at the end of the year for a small to medium sized business typically amounts to a McDonald’s lunch. Your company must be specifically postured and positioned to take any tax credit deduction at all, and you need an accountant that understands leasing accounting practices and can maximize it. Specialty CPA’s and accountants are, as last I checked, not free.

The State of California want’s it’s piece as well. In the finest tradition of the Boston Tea Party and the Boxer Rebellion, California’s Board of Equalization assesses a tax on lease payments. Currently it’s at 9.75% on each and every lease payment you make. That’s another $3200 or so over the term of the lease. While technically not interest, it is a real expense, the total “equivalent” interest is now up to 61%. You can get a better rate from Guido the Killer Pimp. His vig is smaller, too.

LEASING COMPANIES ARE NOT BANKS, AND BANKS ARE NOT LEASING COMPANIES
Sometimes I think all the world is a Delaware Corporation where there are little or no restrictions on interest, and little regulation on the behavior of financial firms squatting within that, and other similarly positioned states. Put another way – They’re Out of Control and can do anything they want, if you agree to it.

Do you own a LLC or a Corporation? If yes, that’s great, but no help here. Even though you are a company, and may have a perfect DUNS and PAYDEX score, it matters not to the leasing company. They want an individual guarantor, a single person that is fully responsible for everything. (LIE #4) The lease, no matter what they say or tell you is nothing more than another extension of your personal credit. Your FICO is on the line if you (or your company) do not make whatever payments, real or imaginary, padded or created, that the leasing company wants. The will pull your bureaus and make a decision from there.

FICO’s less than 700? Don’t bother applying for a lease. They want uninformed small business owners to suck the life out of and make themselves rich in the process. PLUS even though they pull your credit, and use it to make a go/no-go decision from, even if you make perfect lease payments, they don’t report to the bureau’s if all is well (bureau’s charge to do regular reporting) so no FICO benefit is created. Leasing companies are structured to be paid, then paid again. Bad upon bad.

THE WORST IS YET TO COME
Any income generated and reported by the leased equipment goes toward your State and Federal Income Taxes, which depending how creative you accountant is, can be around 10% of your overall net annual revenue. Tax on tax? Why not, after all, this is America. Someone’s gotta’ pay for the waste (that would be you).

Let me bring you current. In the lease I was describing, I cleared the 40 months, and the lease is over. It felt like child support. But remember the buy-out? That’s another 10%.

The leasing company arranged to let me pay the 10% over ten months, about $350 per month. There is probably some sort of interest in there, but I’m too tired to figure it out. Will I ever be done with this? Sure, talk to me next year.

I promised the worst, and here it is.

Just for kicks, I pulled the original invoice to review what’s on it, that is to say what I had originally leased. None of the equipment is in regular rental rotation, none of it is revenue generating, many pieces have failed, and since out of warranty and too expensive to service, just sits so I can have a tax assessment on it. And even if I serviced those pieces – who wants four year old equipment (five by the time I’m done)?, and I’m still paying on it.

While a primitive approach, the best choice to stay lean-and-mean and to stay away from these unscrupulous financial ground feeders and to use the rental or sub-rental process when necessary, until save your money and then go to you favorite vendor to make the best deal. Traditional – very, but you can sleep at night.

IN CONCLUSION
Getting a bank cash loan to buy equipment is an option if you possess the perfect FICO – maybe. Short of cash-in-hand it is the best way as it preserves liquidity in your ability to off unpopular gear as you desire. While the banks have been gifted billions by you and me, they seem to want to hold on to it. Small business, which is the backbone of the American economy, and desperately needs a cash infusion for operations, expansion and paying down debt (and lease payments) has little or no access to it. Recall that these too are personal loans as well. If Charlie Manson was opening up a company that sold human body parts and knives, and he has equity in property and a 825 FICO, the bank will give him a loan. They will call it a “business” loan, but we now know better.

If the cash purchase option is available, you just buy it, you own the gear, you can do whatever you want with it, you don’t obligate you and your company into a variety of (creative) payments and billings into the next decade, you don’t have to pay up to twice what it cost you otherwise, and worst, you don’t have to keep paying for obsolete, ineffective, unpopular or non-functioning equipment ever again.

If I come off a bit jaded, it is for cause. This account is real and true and I welcome any leasing company to comment on my blog. I’ll post it without prejudice or editorial, though I doubt there will be any takers.

Hey leasing company’s – here’s your opportunity to respond. Let’s hear your defense. All the world is waiting…

Tags: Not what it's cracked up to be

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