Capital-Hungry Find a Solution in Equipment Leasing
If you spend your time looking to the future and fretting about the difficulty of finding the capital to get you there, listen to Jim Benskin’s story.
The Texas native came to California eight years ago with a solid idea for a good business--and a business bankruptcy on his record. He had $4,000 in his pocket and stood no chance whatever of rounding up a penny of seed capital anywhere at all.
Today, his company, Netel Educational Systems Inc., headquartered in Claremont, employs 35 people developing and selling software for public schools in California and four other states. Benskin expects $9 million in revenue this year. He thinks he can hit $20 million next year, more thereafter.
How did he pull it off? As do other business owners, he worked very hard--and he made full use of a form of capital financing open to most small businesses and one increasingly becoming the financing method of choice for many: equipment leasing. His story is proof that for any business hungry for capital, equipment leasing can make a lot of sense.
“If you run a software company, you can’t get bank financing--because you have no assets,” Benskin says. “To a bank, the worth of your software is the price of the diskette it comes on. So conventional lending was out of the question for us, and we needed equipment to develop the software.”
Enter Carlos Longoria, national sales manager for Saddleback Financial Corp. in Orange, one of many equipment leasing companies now targeting small businesses in Southern California. In four separate deals, Longoria supplied Benskin with $75,000 in office furniture, phones, computers and even software for the computers. And he structured the deals so Benskin would have time to generate revenue for the payments.
“We were working with school districts--not the fastest payers in the world,” Benskin says. “When we got a purchase order, we walked it through ourselves until it got to payables, and if we had to, we sat there until they wrote us a check. Then we took the check to the bank, cashed it and started all over again.”
Clearly, Benskin had a cash-flow problem. His product, which helps schools track student grade reports, attendance and other matters, sprang from his own inventiveness, but he needed capital to turn his idea into a product. Benskin understood that capital comes in many forms, and he made use of the right form for his own operations.
“A bank requires 20% down when you apply for an equipment purchase loan,” Longoria says. The Small Business Administration “wants you to put up one-third. But with a lease, at most you need the first and last months’ payments, and it’s a lot easier to qualify for a lease than for a loan.”
In addition, Longoria says, the flexibility of leasing allows you to structure a deal to “dollar-out” your investment, so that you may buy the equipment for $1 at the end of the term. Or you can specify a residual value to count as a down payment against new equipment. You can even structure your payments to fit seasonal needs. Farmers, for example, make money at harvest time, so they lease equipment with big payments due when they take crops to market and smaller payments due the rest of the year.
Other benefits to leasing:
* Leasing helps at tax time, because as a rule you can write off your leasing costs faster than you can depreciate the value of the same piece of equipment.
* Leasing is a form of borrowing, so you pay interest on any transaction--but usually at a fixed rate, not at a fluctuating rate as with many bank loans.
* Unlike the debt you incur to buy business equipment, your obligation to pay a lease doesn’t show up on your balance sheet, so it doesn’t affect your ability to borrow from a bank.
* You need good credit, but you don’t have to show financial statements to qualify for a lease.
* It takes days, not weeks, to get a lease approved and funded, giving you quick access to the equipment you need.
Leasing is an option for start-ups and established businesses alike, although start-ups often pay more to lease equipment than established companies, according to Robert Miller, a general partner in another leasing company, Equipment Funding Group in Upland.
“We deal with 20 or 30 funding sources,” Miller says. “They have different criteria, but they all work on the assumption that someone who’s been in business less than two years is a greater risk than someone who’s been around longer.
“Good credit is important, although we do have sources that will handle small blips in your credit history,” Miller adds. “But the farther off the beaten track you are, the harder it is to find a funding source to entertain your application.”
There’s almost no piece of business equipment you can’t lease. Jim Benskin leased everything he needed--office furniture, phones, computers and software. Contractors lease their earthmoving equipment, tanning salons their tanning beds, hospitals their X-ray machines. Franchisees lease fast-food equipment; sometimes they even finance their franchise fees under a lease.
“In small transactions,” Miller says, “it’s true that the cost of leasing is more than that of buying, other things being equal. But in bigger transactions--six figures and up--we can get capital at 2 points over prime, and if we’re conservative in what we add on for our services, leasing remains a very competitive transaction.
“For many businesses, a lease is a better deal all the way around.”
Indeed, as Jim Benskin’s experience shows, leasing can allow the business owner to succeed where others fall prey to frustration in the search for start-up capital.
Freelance writer Juan Hovey may be reached at (805) 492-7909 or by e-mail at jhovey@compuserve.com
